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This is not a negative view at all, it's the well known crisis in monetary economics

There's various ideas that have been floated around for this problem. Bernanke wants a price level target, for example. However, I think the actual effects of that policy would be limited - it's very much focused around what is politically possible.

In the next recession, central banks will resort to buying yet more assets - which would worsen wealth inequality even further and have limited stimulative effects. It's obvious it won't be enough.

We need something much more radical if interests are around 1-2% (as is likely) across the developed world when the next recession comes. I think letting central banks earmark however many billions for public investment by governments and then immediately written off would be the best idea. The problem with that is political however, not economic.

Livio: I don't think you are missing anything, unfortunately. Equilibrium interest rates *might* rise a bit, as demographics change as the boomer all retire. But I am not confident enough in that.

I think we need some change in the monetary policy regime, to create a stronger automatic stabiliser. As Ben above says, switching to a price level path target (or an NGDP level path target) would be one way to do this. The Bank of Canada is sceptical that this would change expectations enough to help. They might have a point; it seemed to take a long time for normal people to get familiar with the Bank's 2% inflation target. But that might be a reason to make the change now, rather than waiting for the next recession. I may blog more on this.

There is quite simply no problem, given another recession. The prescription given by Keynes and MMT (much the same) remains true: have the state print money and spend it (and/or cut taxes). That will cause the private sector’s stock of base money to rise, and there must be some point at which households’ stock of money is large enough to induce them to spend at a rate that brings full employment.

Re Livio’s suggestion that because governments have implemented big doses of fiscal stimulus in recent years, that therefor further doses might not work, I’m baffled. If government announces orders for new infrastructure, or more staff for state owned hospitals or schools, why would contractors, nurses or teachers not come forward to fill relevant vacancies, assuming suitable labour is available?

Because the general level of interest rates has been so low for so long, we can no longer judge the interest rate sensitivity of the economy with the same absolute measure of interest rate change as before. Meaning that the economy should be far more interest rate sensitive to changes in interest rates than it was before (i.e. for the same absolute interest rate change). Meaning that it should be more interest rate sensitive on the upswing in rates - as well as the downswing.

It's hard to visualize a recession that won't be triggered in part by higher interest rates. The question is how high. That will become clear largely by way of consumer debt servicing on mortgages and knock on effects. And then it shouldn't take much interest rate easing to help that part of the problem - in part. But there will still be a recession. Just have to live with it, and let it go until it stops. And until people stop being lunatics in their house buying.

Well, I appreciate the comments and hope Nick tackles the question more methodically. Is there a macro model or framework that allows you to answer this question: Can an economy both run deficits and print money indefinitely because in some respects this seems to be the policy path we have embarked on.

Livio,

Among options are:

1. Technological Advancement - These are outside the purview of monetary policy, though fiscal policy can be somewhat effective through the subsidization of research and development.
2. Baby Boom - Again outside the purview of monetary policy, most baby booms are associated with postwar time economies. Social / religious norms play a part.
3. Immigration - Absent localized growth in population, Canada could incentivize immigration.
4. Consolidation / Imperialism - As seen from the Euro, monetary policy consolidation does not work very well without fiscal consolidation. And so, Canada could by force or through negotiations consolidate monetary / fiscal policies with another country.
5. Increased used of equity finance in lieu of debt on the fiscal level

#5 gives fiscal policy more latitude in that it doesn't create the debt overhang and place it potentially at odds with monetary policy.

Frank, Re your 1, technology makes things worse, in the sense that given constant demand in real terms and improving technology, unemployment will rise.

Same goes for 2, (increased population).

Same goes for 3, more immigration.

And finally, I'm waiting for someone to tell me what's wrong with my above "print money and spend it."

Raph,

"Frank, Re your 1, technology makes things worse, in the sense that given constant demand in real terms and improving technology, unemployment will rise."

Technology both improves the quality of existing goods and makes new goods available.
When new goods are introduced (think automobiles instead of horse drawn wagons or televisions instead of radios), there is an impetus to replace old technology with new.

"Same goes for 2, (increased population)."

??? Why would demand remain fixed with a growing population ???

"Same goes for 3, more immigration."

??? Again, why would demand remain fixed with a growing population ???

"And finally, I'm waiting for someone to tell me what's wrong with my above print money and spend it."

Quite simply, there are no guarantees.

1. Spending money is a fiscal operation and requires a political majority to accomplish.
2. The money spent could be used to reduce outstanding private liabilities (mortgages, corporate debt, student loan debt, etc.) and have no effect on demand.
3. The money spent could be used in a destructive manner (long term costs exceed short term benefit).

What you haven't established is why printing money is a better solution than direct taxation, borrowing, or the sale of equity.

Livio: If the problem is *permanently* low aggregate demand, the solution is to keep printing money and/or running deficits until aggregate demand isn't too low. But the danger is that low aggregate demand is temporary, and you have to suddenly reverse course. It's easy enough to reverse course with monetary policy; the Bank of Canada just sells back the bonds it bought to reduce the money supply. Or raises the overnight rate. But fiscal policy is a lot harder to reverse. You would have to cut spending and/or increase taxes to run a surplus to buy back all the bonds. Which violates efficiency for tax-smoothing and government spending smoothing. As well as being a big political problem.

Nick,

Livio’s claim in his above article was that governments might have no effective tools at all to deal with future recessions. My answer to that was that “print and spend” is bound to work.

Re your point that P&S might be difficult to reverse, I agree that reversal might be politically difficult. The answer to that is to smooth out the reversal with the help of a temporary interest rate hike (which can be done even if the central bank has no bonds do sell: the CB can just wade into the market and borrow at above the going rate).

Re your point that gyrations in government spending do not make sense, I agree. But then it’s not such gyrations that explain excess demand: it’s private sector “irrational exuberance” that explains that excess. Thus the logical way to cut a deficit or run a surplus is raising taxes rather than cutting public spending.

Re your claim that there is some big merit in “tax smoothing”, I don’t get it. To take a simple example, if private sector spending is X% too high and government deals with that excess by adding X% to sales taxes, and that cuts demand in real terms back to its non-inflationary level, what’s the problem?

A final problem with artificial interest rate adjustments by central banks is that the normal assumption in economics is that GDP is maximised when prices (including the price of borrowed money) is at free market levels. Thus artificial changes to interest rates by definition involve reducing GDP.

Frank,

Re No.1, I realize that improved technology improves the quality of goods. But that does not alter the fact that improved technology raises unemployment assuming constant demand in real terms, and hence that your claim that improved technology is a cure for deficient demand is very wide of the mark.

Re, 2, you ask “Why would demand remain fixed with a growing population?” My answer to that is “Why would demand rise just because the population rises?” Economists have argued for decades if not centuries over that one. Say’s law and the Pigou effect are two possible answers, but the consensus nowadays is that neither of the two latter are very effective. I.e. the consensus is that Keynes was right when he said that economies can get stuck in a high unemployment equilibrium. One of the solutions he proposed (in the early 1930s) was the “print and spend” solution I suggested above in answer to Livio and Nick.

I.e. I suggest that when the population rises, unemployment is likely to rise pari passu unless the stock of base money and government debt rises as well, and the two latter can only be raised via a deficit (i.e. “print and spend” and “borrow and spend”).

Ralph: tax-smoothing matters because taxes are distorting (disincentive effects etc) and the size of the deadweight loss triangle from those distortions rises with the square of the tax rate (roughly) because both the base and the height of the triangle double when you double the base, so the area quadruples.

If fluctuations in AD are thought of as fluctuations in r* (IS curve shifts, where r* is the r at which the IS curve hits "full employment") then adjusting r to follow r* is not "artificial". It's what the free market "wants" to happen, because of changing desires to save and/or invest.

Ralph,

"But that does not alter the fact that improved technology raises unemployment assuming constant demand in real terms.."

First, the title of Nick's article is "So what happens in the next recession" not "So what happens the next time real demand goes constant".
Recessions are measured by changes in real GDP not by changes in real demand.
If I grow my own tomatoes, my real demand is fulfilled and has no effect on GDP.
If instead I work a 9 to 5 job, receive a paycheck, and trade a portion of that paycheck for tomatoes, then GDP (both real and nominal) rises and falls with my purchase of tomatoes.

And so technological improvements may or may not add to real demand, but instead add to GDP through a substitution effect - what I once accomplished with my own two hands, I now trade for.

Second, I don't accept your assumption that real demand is constant or that even assuming real demand is constant will tell you what GDP (real or nominal) will be going forward.

"I.e. I suggest that when the population rises, unemployment is likely to rise pari passu unless the stock of base money and government debt rises as well..."

Third, I disagree that the stock of base money and government debt must rise to bring an increasing population to full employment.
In Irving Fisher parlance - MV = PT, either M OR V can rise.

JKH,
Meaning that the economy should be far more interest rate sensitive to changes in interest rates than it was before (i.e. for the same absolute interest rate change).

Wouldn't that analysis require that 1) leverage be way up, and/or 2) profit margins are thin? I mean, interest rates don't wreck havoc all on their own. There has to be some mechanism through which they effect the economy. Maybe everyone is so leveraged that a small increase in rates would sink them and a small decrease in rates would spur much more investment. I don't buy it. Certainly consumption choices have not gotten more sensitive to the over night rate. I think they are much closer to being inelastic, and it is really things like business and mortgage borrowing that have always driven the show, not households choosing to save more because Fed Funds goes up by a couple of percent.

If I were to compare the economy today to the economy in 2006 (when FF was 5%), what about the economy now makes it so much more sensitive to rates? Profits are higher today, leverage is lower, median household income is about the same. The one big difference is that the average household is less wildly convinced that their house is a pot of gold. Sure, hiking rates tomorrow to 5% would be a big shock, but a 3.75% hike would be a big shock in any environment. But a smooth rise, say one percent a year -- I'm not sure why the economy can't handle it. Maybe you are right, but I don't see why.

I don't think we've ever understood the mechanism by which interest rates affect the economy well enough to explain why we need an X% cut to achieve a Y% increase in income, or for that matter, prices. It's all black magic, and I don't understand why it must be absolute and unchanging, or even symmetrical. We do allow a fudge factor in having the natural rate bounce around to allow us to keep the overall equation the same, but why is that justified? Certainly the phillips curve keeps changing.

It's also possible that there is a lot of path dependence, and for some reason the economy is much more sensitive to rate hikes than to rate cuts, in which case this is very bad news for using interest policy for long term stabilization, especially if you believe that PLT won't buy you a whole lot.

RSJ,

"There has to be some mechanism through which they effect the economy."
"If I were to compare the economy today to the economy in 2006 (when FF was 5%), what about the economy now makes it so much more sensitive to rates?"

In the U. S. -

https://fred.stlouisfed.org/series/GFDEGDQ188S

Federal debt as a percentage of GDP was about 61% in 2006 and is now at 103%.
Total federal debt is about $19.5 Trillion.
An instantaneous move to a short rate of 5% would push interest expenditures on federal debt to north of $1 Trillion dollars per year.

https://fred.stlouisfed.org/series/W006RC1Q027SBEA

U. S. Federal tax receipts are just north of about $2 Trillion of which 50% would be used to service debt.
The highest that ratio has ever gone is 49% twice (1985 and 1991).

There comes a point as that ratio goes higher and higher where the credit worthiness of the U. S. government comes into question.

Frank,

1. Your existing coupons don't start paying more when rates go up, lol.

2, And no one would instantly hike rates by almost 4%

3. The U.S. is a currency issuer. We aren't gonna run out of money. The issue isn't the solvency of the government but of the functioning of the private sector. They are the ones we are focusing on here.

4. Ask Japan how high debt/GDP can go. They're still struggling with trying to get inflation up and running over there.

5. You wouldn't be a gold bug or anything, would you?

rsj

good points

I’m thinking mostly of the mortgage market (admittedly from a Canadian perspective)

It’s a simple math point for the most part

If rates are 6 per cent, a 50 per cent increase in rates is 3 per cent

If rates are 3 per cent, a 50 per cent increase in rates is 1.5 per cent

If you’ve pushed your borrowing size relative to qualifying income to the limit, a 50 per cent increase in rates will be painful – and the second case will be equally painful as the first case, other things equal

Apart from that, I think the interest rate sensitivity of the economy should be a strong function of the interest rate sensitivity of the mortgage market, given the knock-on demand effect of people struggling to pay variable rate mortgages or renew fixed rate mortgages

It’s been quite a while since we felt this kind of pain, given the generally deflationary trend of interest rates in recent years

I haven’t given the corporate side much thought, although banking pain goes along with mortgagor pain

To Canada’s credit, it has a very strong regulatory system for this type of thing

Lots of cumulative tweaking to required mortgage ratios in the last few years, which should help dampen this type of higher rate adjustment pain, to some degree

The preeminent strength of the Canadian system has been the clear separation of bank and financial services regulation from central bank responsibilities

The US system conversely weak – terrible system

Nick,

You claim “tax-smoothing matters because taxes are distorting (disincentive effects etc)”. My answer to that is that in as far as tax consists of a sales tax on all goods and services (e.g. VAT), there is no distortion.

But to the extent that sales taxes ARE SKEWED towards particular products (e.g. high tax on alcohol), that is for reasons which are regarded as beneficial. Ergo the distortion does not matter.

As to income tax, same applies. While high taxes on high earners are supposed to reduce incentives, those high taxes are imposed because they are seen as on balance bringing benefits. Ergo the distortion does not matter. Plus it is very questionable as to whether high tax on high earners really does cut incentives: we had far less inequality in the 1960s, yet economic growth in the 60s was better than over the last decade.

Re your claim that artificially changing r so that it mimicks r* is not “artificial” because r* is a genuine free market variable, that assumes there is some defect in the free market that stops r fluctuating as much as it should. What is that defect? I can’t see one.

In contrast to that, there is a very clear defect which stops another free market cure for recessions working, as follows. In a recession, and given a totally free market, wages and prices would fall, which would increase the real value of the monetary base (and government debt, which is virtually the same thing as base money). That in turn would induce people to spend more. That’s the Pigou effect. But that is thwarted by a very well known defect which Keynes pointed out: the “wages are sticky downwards” phenomenon.

I conclude that the best way of dealing with recessions is “print and spend” – as advocated by many MMTers and by Positive Money, though I wouldn’t totally rules out interest rate hikes in an emergency as already indicated.

Ralph: "Re your claim that artificially changing r so that it mimicks r* is not “artificial” because r* is a genuine free market variable, that assumes there is some defect in the free market that stops r fluctuating as much as it should. What is that defect? I can’t see one."

It's the central bank itself, if it sets an r that is greater than or less than r*, and not adjusting r so that it fluctuates along with r* and always equals r*.

Nick,

I don't follow.

Frank,

We’re discussing whether improved technology raises demand (as you claim) or not. I totally fail to see why you need to drag the distinction between people growing their own tomatoes and buying them with cash into this discussion.

But anyway, in connection with the latter distinction, you seem to claim that purchasing tomatoes instead of growing them oneself raises demand. That’s true: at least demand in terms of money offered for goods and services rises. But that rise in demand is caused by shifting from growing your own tomatoes to buying them in shops. That’s nothing to do with improved technology.!!!!

Re my “constant AD” assumption, you’re right: I’m begging the question there. I shouldn’t have made that assumption. However, you still haven’t explained why a population increase raises AD, or more importantly why it helps end recessions. To illustrate, Spain has a population roughly 80% that of the UK. If Spain had a big population increase, and brought the population up to that of the UK, I see no earthly reason why a 20% larger population would help Spain avoid recessions. Perhaps you can explain.

JKH,

Let's define two channels: financing costs and investment:

If rates go up *and* the household has a variable rate loan, they will face increasing costs. But 90% of U.S. households have fixed rate mortgages for the full term -- 30 year fixed rate mortgages or similar. Their costs don't go up. They do experience some capital losses when they sell, but the new house they bus is also cheaper. It's mostly a wash.

But, because house prices are falling, home builders build fewer homes, and households spend less on improving their home, therefore there is a decline in residential investment. This leads to a general decline in income. (That may mean that some borrowers go belly up because their income declines, even though their financing costs are constant)

The same is true for businesses. Firm profits can fall because their financing costs go up or because there is a reduction in revenue from less business investment as a result of higher rates.

I think in almost all cases, the investment channel dominates.

In terms of the relative stability of Canada versus the U.S., variable rate balloon loans are much more common there. They need tighter regulation because this financing structure is so fragile. Of course, it's great for the banks. They are more shielded from interest rate risks and deal with shorter term loans. So if you are assessing risk as risk to the financial sector, than Canada is clearly less risky. But that risk is pushed onto households, which is the opposite of what banks should be doing in an economy. At the same time, Canada's GDP growth is more dependent on residential investment -- hugely dependent. So I don't think the Canadian economy can withstand higher rates easier than the U.S. economy, even if Canadian banks can.

RSJ,

"1. Your existing coupons don't start paying more when rates go up, lol."

The average maturity on U. S. government debt is something like 4-5 years.
No coupons wouldn't instantly go skyward, but it wouldn't take very long for them to creep up to the Fed Funds rate and higher.

"2. And no one would instantly hike rates by almost 4%."

I never said they would. I was trying to answer your question:
"But a smooth rise, say one percent a year -- I'm not sure why the economy can't handle it. Maybe you are right, but I don't see why."

Even a smooth rise of one percent a year can be problematic from a fiscal point of view given that political turnover happens once every two years for House of Representative members, once every four years for Presidents, and once every six years for Senate members.

"3a. The U.S. is a currency issuer. We aren't gonna run out of money. The issue isn't the solvency of the government but of the functioning of the private sector. They are the ones we are focusing on here."

It's very true that the U. S. is a currency issuer and we aren't going to run out of money.

"3b. The issue isn't the solvency of the government but of the functioning of the private sector."

It's very true that the federal government is highly unlikely to go insolvent. But the federal government facing rising interest payments could curtain other expenditures (Social Security benefits, military expenditures, etc.) or raise taxes. How would those other changes in fiscal policy affect the private sector?

"4. Ask Japan how high debt/GDP can go. They're still struggling with trying to get inflation up and running over there."

https://fred.stlouisfed.org/series/DEBTTLJPA188A#0
https://fred.stlouisfed.org/series/INTDSRJPM193N
https://www.japanmacroadvisors.com/page/category/economic-indicators/financial-markets/avg-duration-of-jgbs/

It's at 200% and rising.
The Japanese short rate is also 0.3%.
The average duration of Japanese debt is about 8 years.

"5. You wouldn't be a gold bug or anything, would you?"

Nope, I prefer to refer to myself as a productivity bug.

Ralph,

"We’re discussing whether improved technology raises demand (as you claim) or not."

We are discussing whether improved technology raises real GDP not real demand.
See the title of Nick's article "So what happens in the next recession".
Recessions are defined as periods of falling real GDP not falling (or flat) real demand.

"But anyway, in connection with the latter distinction, you seem to claim that purchasing tomatoes instead of growing them oneself raises demand."
No I make no such claim, read my post. Demand remains the same whether I grow my own tomatoes or buy them from someone else.
GDP rises when I buy more tomatoes, GDP does not rise when I grow more of my own tomatoes.

"That’s nothing to do with improved technology.!!!!"
Sure it does. Once tomatoes are harvested, they need to be transported across large distances (technology) and refrigerated (technology).

Ralph,

"To illustrate, Spain has a population roughly 80% that of the UK. If Spain had a big population increase, and brought the population up to that of the UK, I see no earthly reason why a 20% larger population would help Spain avoid recessions. Perhaps you can explain."

Would you agree that people have some basic needs that they are not going to forgo under any circumstance (you know food, drink, shelter, etc.)?
Would you agree that given those basic needs, a rising population will create a higher demand for those basic needs?

Sure, I can think of a lot of situations where a population increase doesn't translate into higher real GDP growth - maybe Spain imports everything, maybe supply constraints force Spaniards to each consume less even while the population grows, maybe Spain is conquered by Portugal and it's constituents are placed in indentured servitude.

I was merely offering possibilities to Livio's question - "Where is that kind of room to manoeuvre now?" just as you were.

And I admit, there are no guarantees in any of the possibilities that I identified, just as there are no guarantees that money printed and spent by government has a political majority supporting it, will not be used to reduce private liabilities, and will not be used by said government to fund destructive enterprises.

Frank,

Re your last comment above, if new money IS USED to reduce private liabilities rather than raise demand, that's no problem: just create and spend more new money. I.e. as I said above, the "print and spend" option is bound to work eventually.

Re the possibility that government uses new money to fund "destructive enterprises", that outcome would not confound my claim that "print and spend" is bound to work at least in the sense that it brings full employment. Also, the idea that government will suddenly devote 100% of new money to destructive enterprises is a very unrealistic assumption, and one clearly designed to suit your argument. A more realistic assumption is that value for money obtained from freshly created and spent money is about the same as that obtained from EXISTING government spending.

Ralph,

"Print and spend option is bound to work eventually"

Eventually can be a really long time. In fact, any solution that you or I can put out there, we can simply preface it with saying - "Well, eventually it will work".

We can send microbes out into deep space and eventually they will take root on some unknown planet, and eventually they will develop into higher life forms, and eventually we will figure out a way to communicate with them, and eventually we will be able to consolidate their economy with ours thereby raising GDP.

Also, because we are talking about fiscal operations, there needs to be political will to see things through to the end.
Eventually the U. S. would have conquered Japan during World War II using conventional arms, the U. S. used nuclear weapons instead.
Expediency counts for a lot in political circles.

Ralph,

And sure a government that pays soldiers to put bullets through the heads of everyone that is unemployed will tackle any unemployment problem, but again, the title of Nick's article is "What happens in the next recession?", not what happens when you have a lot of unemployed people.

Believe it or not, you can have a decreasing employment to population ratio (unemployment rises) and at the same time have a growing economy (Real GDP grows).

Frank: this post is by Livio, not me.

Sorry about that Nick.

I have really enjoyed the discussion this post has generated. And I am flattered to think that when I post on a macro topic people think its Nick!:)

"And sure a government that pays soldiers to put bullets through the heads of everyone that is unemployed will tackle any unemployment problem, ..."
Giving them opiates paid for on government health benefits is surely more humane and might even be less obvious.

Hey here's an idea... we dig a big pit and then put assorted weapons into the hands of the unemployed, push them into the pit and let them all fight it out, until only one guy remains. Then we can come up with a story where they all blame each other and that last guy becomes a national hero. Call it "Thunderdome" or something.

Oh no, I've got an even better one... we don't dig the pit but instead we put the unemployed, along with plenty of weapons and some spanking fresh uniforms, into troop transports, send them overseas to fight to the death against the unemployed from a different nation. Then both nations can tackle the unemployment problem, and we come up with a story where we blame them while they come up with a story to blame us... we could call it "War". How about that one?

I think that if John Maynard Keynes had heard about this concept, he would have written a book and called it, "How to Pay for War". Well, even Keynes wouldn't have been brash enough to call it, "How to Neck the Unemployed".

"... again, the title of Nick's article is "What happens in the next recession?", not what happens when you have a lot of unemployed people."

Are you sure you want to rule out war as an option here? It does coincidentally solve a number of other problems governments have been wrangling with, like the "Oh crap where did my retirement go, and now I'm cranky and want to throttle whoever might be responsible for this" problem. It also gives a little reality check to certain groups of people on topics such as: the fundamental underpinnings of nation states; what loyalty means; how society fits together; what is our purpose; and all those other niggling things that have risen to the surface lately. Aside from that, we are already at war and have been for some time, steadily escalating so even if all you do is draw a straight line projection it still leads in that direction.

The last recession I lobbied for a rust-belt retool to wind turbines. I'd've lobbied for medical equipment instead if I could redo. There are scaling valleys-of-death that could be aided by stimulus. Zunum is hoping to have a 20 seat electric plane in 4 years. A Rolls Royce partnership is hoping to have one of four turbines electric for an existing refitted 100 seat model. Smaller engines seem to permit easier introduction of electric power and thus electric batteries in the air. The last PM had an esoteric metals subsidy that could be focused to help introduce electric air engines and thus battery power. Helicopters will lift suppies in disasters; can be electric.
A woman wants to shrink an MRI. If the RF coil are quadrature (two of them), they alone can be used to image whether an employee thinks with ethics, and things like conflicts of interest can be proven and learned to avoid at home eventually. New superconductors can be subsidized via stockpiling key elements in warehouses, as well as rail guns and lasers being introduced into the armed forces. Eventually the rust belt and 3d printing facilities as well as universities will have ethical employees and hack-proof buildings or this will become a back to basics short-wave conversation.

1) Whatever-it-takes monetary policy including purchase of assets of whatever maturity and currency denomination.
2) "Fiscal policy" consisting of a) additional investment in projects which come to have positive NPVs because marginal costs of inputs into public projects fall below their market price and because (presumably) the cost of borrowing will have fallen as a result of 1) and b) reductions in taxes (as the fall of the cost of borrowing will raise the optimal amount of borrowing/tax revenue.

The tricky part is figuring out over which horizon the cost of borrowing has fallen and the divergence between marginal costs and market prices will persist and to chose the projects for execution and taxes for reduction accordingly. At the margin, if monetary policy can be counted on to limit the depth and length of the recession sufficiently, the role of "fiscal policy" practically vanishes.

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