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the icy hill metaphor is superior

the whole point is that it's difficult, if you fail at the outset, to get traction halfway into ("up") the process

the escalator is not problematic for traction half way up - so its a poor metaphor

the icy hill is a problem for precisely that reason - its difficult to get traction halfway up - so its a great analogy

Why does adding more stimulus not work as well as initial stimulus? It should put the same number of people to work. I can see the political problem, but that's not spinning out on a hill, that's getting tired on an escalator.

The world economy is in danger again, some public debts are becoming too high, so fidbit too simple. (By the way, I dont believe in these narrow limtrs of fiscal policy: Hungary, for ex., has lower debts and deficits than the US...Spain too. So there s something else going on).

With reference also to previous posts, I understand the logic of reducing real interest rates by rising expectations of future inflation. Thus, burning ECB/FED assets on the public square, you say, would make the increase in money supply permanent, and ad credibility to a policy of (future) higher inflation. Ok.

But there is much more that that in this proposal. For one thing, Central banks can always reduce M if they want (raising compulsory bank reserves ratios is one way). Also, see Posen on Japan: the lesson he draws is that monetary policy is a very weak tool especially at the zero bound, no matter how much quantitative easing you do. So Krugman is right to say that we should rely mainly on fiscal policy. But he adds: "until it is possible", meaning until debts are not too large.

Burning Gov Bonds in the public square signals to the markets an fiscal autorities that the gov solvency equation (constraint) is being relaxed, and there is more room for fiscal expansion.

So Nick I think your idea of raising expected inflation is nice, subtle, correct. But weak. Academically nice, but we need more. Fiscal policy money financed, is much more dirct and powerful.

The problem with both metaphors is the assumption that "stimulus" propels you.

Is the stimulus simply transfer payments that do nothing to produce (e.g., extension of unemployment) or are they adding value to our economy (e.g., infrastructure, job training, economic development.)

If it is the former, then that escalator simply becomes overpriced gym equipment.

We usually think only in inflation GDP term. What about asset prices? The deflation has a pernicious distributive effect against debtors (their debt rise) but also creditors (because they can´t get their money). We all are loosers. The trick is to restore confidence in the debtors and creditors, and that is much more longer and uncertain that to get an inflation rate. Perhaps is this the reason why Japan has never get out of the liquidity trap?. The QE period was not sufficient.

Is there a theory that says why there will be a "top of the hill" or "top of the escalator" on the economic side of the analogy? In the comparative static way that I'm used to thinking, it seems as though one would never get to the top, no matter how fast one runs or how hard one presses on the accelerator. Or, if the top represents full employment, maybe one could say you would get to the top, but that the mall is closing and they have now placed a block at the top of the escalator, so you can't get off, and you will have to keep walking to stay at the top. In that case, there is no critical speed that you have to exceed in order to have enough momentum. It's just that, if you find you find you are backsliding, you have to walk faster. And "running out of gas" is just as much a problem if you run as if you walk: if you run you'll get to the top but you'll run out of gas sooner and be carried back down to the bottom; if you walk, you may not get to the top, but at least you'll manage to stay in the middle for a long time before you get sent back to the bottom.

I have to object a bit to Stephen's comment, though. If, in fact, the stimulus takes the form of transfer payments financed via seigniorage (as they would be, under the ZIRP conditions that still prevail in the US), then it might actually be easier to make the case for a "critical momentum" or "tipping point." We're essentially talking about dropping money from a helicopter. When you talk about dropping money from a helicopter, you can always get people to agree that it will be effective if you do enough of it. "If we drop enough to given each person $1,000,000, surely they're going to feel richer and start spending, don't you think?" But often people will object that, if you only drop a little bit of money, it will have no effect at all. (Balance sheet repair might, for example, introduce a non-linearity, where people save the helicopter drop until they get to the point where they feel comfortable spending.) So, essentially, the escalator is overpriced gym equipment if you're walking, but if you run fast enough, you really do end up adding value (by producing more of what consumers want). Of course, getting back to the metaphor in my last comment, the danger is that you will run so fast as to crash into the block at the top and have an accident.

"If you walk up the down escalator, you might end up just standing still, until you "run out of gas" (mixing the two metaphors). For fiscal policy, "running out of gas" means the debt/GDP ratio gets "too high" to continue. (I'm ducking the question of what precisely that means)."

Wise choice. ;)

How about this? The debt/GDP ratio is too high if the debt/deficit fear mongers sap the national will enough to prevent adequate stimulus.

Which brings me back to my repeated question. Why do the people who talk about the debt/GDP ratio say that the debt should be brought down instead of saying that the GDP should be increased?

Focus on growth (Min) with fiscal policy money financed via crediting accounts of suppliers(PierGiorgio)but with discretionary emphasis on investment that raises future productive capacity and income support for the poor. The only limit to fiscal policy (sustainability) for a fiat/nonconvertible currency monetary regime with flexible exchange rates is the availability of unemployed resources. Taxes? what taxes? They are not a source of revenue only an allocative mechanism! What do you do when you collect them? "You distribute them, stupid!" (joke)

I am not sold on the escalator metaphor. If you are going down the down escalator and realize that you want to go back up, you just ride the down escalator to the bottom and then get on the up escalator.

The icy-hill metaphor captures the desire to not only get to the top, but also avoid going down to the bottom.

"If you are going down the down escalator and realize that you want to go back up, you just ride the down escalator to the bottom and then get on the up escalator."

Erin Weir: Austrian Economist

Nick, As you may know I find the concept of a fiscal multiplier to be incoherent, as it all depends on what the monetary authority is doing, and no one agrees what "doing nothing" is. But for the sake of argument, assume doing nothing is a constant monetary base. Here is what I don't get. If fiscal stimulus X produces full recovery, why doesn't fiscal stimulus X/2 produce 1/2 of full recovery? I guess that's a long-winded way of saying "why isn't it linear?"

True story: In Munich I started down an escalator, quickly changed my mind, and started running up. I slipped and injured myself (nothing serious). My advice: if you change your mind just go down the escalator and then go up the other escalator. For fiscal policy, just ride down to a Singapore-style budget surplus, and then ride up the monetary escalator to 5% NGDP growth.

Unfortunately the monetary policy escalator doesn't get you anywhere when households are de-leveraging. We have only one elevator now, and riding it down does not lead to budget surpluses, but deficits, as the bulk of the deficits are automatic stabilizers and lower tax receipts. A contracting economy, if left alone, does not lead to budget surpluses.

“Erin Weir: Austrian Economist”


Seriously, though, the Austrian School implications are exactly what bother me about Nick’s escalator metaphor.

If you are caught in high winds in a canoe. you must move to the bow to paddle, dragging the canoe behind you. You must completely change your mode of operations since failure is guaranteed if you continue to paddle from the stern, as the wind whips the bow of the canoe in circles.

It's the only way to get to shelter in open water and it lowers your risk of capsizing once you are in the bow. Can ya tell I grew up in a canoe?

Metaphors only work when you understand the subject and can use the correct analogies.

Than being said, we agree on disinflation.

Slope man? Why is it more difficult for fiscal of monetary policy to get traction in a shallow recession (halfway up the hill) than in a deep recession (at the bottom)? The usual argument is that monetary policy has difficulty getting traction in a deep recession, when short safe nominal interest rates have already fallen to zero?

Jim Rootham: you're agreeing with me, right, and asking that question of slope man?

PierGiorgio: I agree that money-financed fiscal policy should be the most powerful weapon in the armory. And the lest limited.

Stephen G: Yes, both metaphors assume that there can be stimulus. Remember though, if the recession is caused by insufficient demand, then that's what stimulus should be directed at, rather than supply (which is what we want in normal times).

Luis: increasing inflation (or reducing deflation) may be a consequence of successful demand stimulus. And increasing *expected* inflation (reducing expected deflation) will help to increase demand.

Andy: In the simplest models, if there were a permanent recessionary shock, the stimulus would have to be permanent as well, until the exogenous shock reversed itself. But there are lots of effects that might mean a temporary shock could cause a permanent recession, and a temporary stimulus to demand would be all that were needed ("pump priming" is the old metaphor). Once people stop fearing deflation, and recession, spending could recover, balance sheets would recover, so the recovery could be self-sustaining. Both metaphors make that assumption.

Min: "How about this? The debt/GDP ratio is too high if the debt/deficit fear mongers sap the national will enough to prevent adequate stimulus."

That political constraint might be the first one that's hit. In the Eurozone countries (which can't print), financial markets might constrain debt/GDP ratios before political constraints begin to bite (e.g. Greece).

"Which brings me back to my repeated question. Why do the people who talk about the debt/GDP ratio say that the debt should be brought down instead of saying that the GDP should be increased?"

Which in turn raises the question, how big is the cumulative fiscal multiplier? Can it ever be big enough that running deficits for a few years might expand output so much that the debt/GDP ratio is lower than it would be otherwise? A "Keynesian Laffer curve" in other words. It's not theoretically impossible. But if my elevator metaphor is correct, you would need a big quick short deficit to do this.

Damn! The Brit in me keeps on muddling escalator and elevator. I *don't* mean "lift"!

Panayotis: Yep. But this goes back to my previous post: will deficits in fact be permanently money-financed?

Erin and ggg: I had to laugh at that exchange! Sorry!

Erin: "Seriously, though, the Austrian School implications are exactly what bother me about Nick’s escalator metaphor."

What Austrian implications? The simplest model that could generate my metaphor would be a New Keynesian/Neo Wicksellian model where a recession causes steadily increasing deflation and expected deflation, which cause AD to fall and keep on falling. In that model, the bottom of the elevator is total collapse of the monetary system, and a resort to barter. No self-recuperative properties whatever. Not very Austrian. Or am I misunderstanding you?

Organic George: That was Bill Mason's advice too. Trouble is, I find that my body has a "sail effect" as well as a weight effect. Shifting the sail forwards can counteract the good effects of shifting my weight forward. (I need to put on weight, or lose height). But yes, shifting my packs forwards helps. Being a Brit immigrant, I came to canoeing late in life, unlike you true Canadians who were definitely conceived, and maybe even born in a canoe!

Nick, I know that you did not mean to deliver an Austrian message. However, as ggg pointed out, the real-life solution of just riding the escalator all the way down and then getting on the up escalator is essentially the Austrian prescription. So, the escalator metaphor has unintended Austrian implications.

I wonder why the monetary stimulus (we mean different things by this, I guess) is stronger than the fiscal stimulus. To me, the potential monetary stimulus is zero once the overnight rate is zero. But you argue that giving money away is monetary policy, which I call fiscal policy. Hmm. Let's use Samuelson's definition, which is that government spending and taxing is fiscal policy, and the financing of that spending by bond purchases or money creation is monetary policy.

Using that definition, there is a hard limit to monetary policy, in that if the government has a deficit of X and an outstanding stock of bonds Y, then no more than X+Y worth of bonds can be replaced with newly created money. Attempts to create even more money are dependent on further increases in government spending.

On the other hand, fiscal policy has much more room: you can keep deficit spending and mailing checks out to people and/or buying goods from businesses until inflation starts up again. It will start up again *eventually* -- so fiscal policy is guaranteed to work.

Now what would be the limits on such a fiscal policy? Well, if you are a non-printer, then you have zero options for creating money and limited options for fiscal policy.

But if you are a printer, then your debt will always be default-free, however the markets may fear inflation. But congratulations -- once inflation fears set in, then you can turn off the spigot, as you are done. So fiscal policy is guaranteed to get you there, whereas monetary policy -- at least according to the definition of the post -- will do nothing once overnight rates are zero.

The collateral used for bank refinancing at the discount window can always be expanded to include other form of assets rather than government bonds. More discipline!

"The collateral used for bank refinancing at the discount window can always be expanded to include other form of assets rather than government bonds. "

Change "refinancing" to "bank lending", and the answer is yes. But I'm not sure how relevant this is, as those loans need to be re-paid, at which point the collateral goes back into the private sector. The CB (at least in the U.S.) is not allowed to *purchase* non government bonds.

However, the important point is to have a consistent definition of fiscal and monetary policy. The mailing of checks to households -- e.g. helicopter drops -- is illegal for both the ECB and the Fed. That is clearly fiscal policy. Even if you disagree on that point, then you need to take the mailing of checks out of the rubric of government spending and into the rubric of CB lending, which is serious stretch. The government mails checks all the time as part of its fiscal spending. Bernanke urged the government to mail checks (tax rebates) in the first stimulus round, and he was pretty clear that this is fiscal policy.

In either case, you need an orthogonal definition of fiscal and monetary policy in order for us to talk about the economic impact and not be muddled about the terms.


It is good to see you are stating your assumptions and your hypothesis so someone can have a thoughtful dialogue with you. This is discipline as you know!

I never mentioned hellicopter drops as legal. as far as how you define monetary or fiscal policy it is important to examine who controls the instrument you are using. Is the CB rally independent and follows its own rules? There ia a debate going on that. Furthermore, there are voluntary constraints on policy (political/legislative) and some times more on the Treasury than on the CB.

P, this is irrelevant.

You need to have a definition of what is fiscal policy and what is monetary policy. We are trying to debate which type of policy is constrained, and which type of policy is more effective.

Whether an actual CB can ignore rules and engage in backdoor fiscal policy is beside the point.

Unless your definition of monetary policy is "whatever the CB does, even assuming it is allowed to break rules and do whatever it wants". In that case, monetary policy is pretty much anything, and the argument as to which is more effective is clearly "monetary policy".

On second thought... I think I discovered why Nick and Scott think monetary policy is more effective :P


Again you do not make sense! Discipline!

Alas, P, I have a difficult time understanding you. Sometimes I think I understand what you are saying, but then at other times it seems to be context-free-grammar. Perhaps this is a language issue? And of course, many people have a hard time understanding me, too!

I would like to advocate a plan for those at the bottom of society who have been ignored, a plan that exposes the deficit hawks as establishment stooges and unable to solve the problem of putting people back to work. I'll give them what they want policies that are payed for and won't increase the deficit.

Raise the poverty threshold. This will make more people eligible for government programs like food stamps and Medicaid and the VA health care.

Raise taxes on higher income earners and corporations that use government programs to subsidize their low wage workers. This should be done since the availability of more government programs would be an incentive for them to keep wages low.

I'm looking for a scarcity of labor at the bottom of society to increase wages. I'll do this by decreasing the supply and increasing the demand.

Supply will be decreased because people will be reluctant to take jobs where their total compensation doesn't equal any loss they might suffer in government subsidies.

Stop the source of illegal immigration with the use of a national identity card the recipient of which must be verified by the government before employment. Put draconian fines on businesses that don't comply. Make it a criminal offense not the comply.

This should raise economic activity in the bottom of society, if for no other reason than it will stop transfer payments--money that could be used in poorer communities from going out of country.

Put a tariff on China--Kurgman suggest 25% to keep them from beggering jobs from other countries. This will raise prices here but it will also signal the governments willingness to reinstitute tariffs which should keep outsourcing down and "Made in America" products up.

Use this hammer and anvil policy to stem the fears of those economist and politicians who see no multiplier effect in government spending and only the fear of inflation. How? The hammer and anvil policy pays as it goes.

Oh, one other way of raising revenues would be a tax on stock transfers. This will make in more unlikely that there is another volatility crisis--a flash crash--in financial markets and will drive useless speculators that deserve to lose their jobs out of the market.

Taxing stock transfers will drive arbitures out of the market while raising revenues that can be used to helping those that were hurt through no fault of their own by the financial crisis.

Will those who reject policy that might put people back to work for fear of inflation accept non-inflationary policies? The answer is, no they won't because they reject any new taxes.

Every effort will be made to keep the status quo and return to the policies of old. To keep this from happening I suggest advertisments funded by non-governmental sources aimed at those below and just above the poverty line showing them the benefits that can be derived if they register and vote.

Show them where their interests lie: voting more democrats in and republicans out of office. The tag line should be, "With the republicans gone the democrats will have no more excuses."

Of course some economist will always have excuses not to help those at the back of the line, however, politicians who are deficit hawks, for fear of losing there jobs to new poorer voters will find it harder to not raise taxes on those at the front.

These changes should answer the prayers of those economist who worry about deficits and inflation since all new programs will be payed for. They can then turn their attention to wage inflation caused by those at the bottom of society demanding and getting better wages and compensation--better to worry about that then imaginary inflation.

Besides, there is a rough justice in those who caused this mess paying for the harm caused and those who benefit disproportionally from our trade policies through labor arbitrage finding it harder to do so.

Will there be unforseen consequences? Yes, and I'm sure the same economist who couldn't see a bubble a mile wide right in front of their faces will find everyone one of them.

A new status quo can't be brought about without breaking a few establishment eggs. Those at the bottom of society need to register and vote. That won't happen unless they know where their interests lie and are presented with a political map for achieving them.

That is not something the establishment will present them with. Thankfully we have democracy, and democracy as its proven time and again that its bigger than the establishment.

Those who the establishment ignores will have to sieze the day themselves. The establishment has been shown to have feet of clay. They can't bring about reform because they can't pass laws to punish their own. They can only provide us with platudes about upward mobility.

Did I just piece this together out of out of scraps of paper? Yes. But they fit together and make more sense than anything economist or politicians have put together, which should say something about how impotent they both are in solving our problems.

Normally I'm against changing society in order to get the economic results one wants. But I'm driven to it by the deficit hawks who are screwing with our economic recovery and can't put anyone back to work.

Those who fear deficits and inflation won't run up the elevator and the politicians won't tax those at the top of society, so how are they planning to lift the recession from those at the bottom?

The republicans won't the democrats might. If they fail, god only knows who the voters will pick to solve problems. It won't be the do-nothing republicans or the never-do enough democrats.

We have already seen that the failure to enforce our immagration laws has lead to a turn to the right. I don't what to go there. So the next time the president of Mexico comes here I have five words for him: "Stay out of our politics." He might not want to see transfer payments--Mexico's largest industry--cut, but I don't want to see the right here put back into power by him enflaming an already bad situation.

The situation was brought about by the refusal of either party to enforce our immigration laws. Right now the enforcement ball is in the democrats court. Not acting can only help the right.

Ok, this catharsis or rant by a non-economist has gone on for too long but these scabbals among economist, irk me. They are based more on interests and ideology than economics. I'm sure they are important to future policy, but since we need action now, they take on the appearance of fiddling while Rome burns.

These scabbles also encourage the penchent of congress and Obama to advocate policies that appease the establishment. The establishment has failed. It doesn't need appeased it needs changed, it needs regulated, and it needs to feel the sanctions of the law and the voters foot on its neck.

Erin: Aha! Now I get it. Sorry, I misunderstood you completely. I thought *you* were recommending that. It's obvious what you meant, now you have explained it to me *very* slowly. Yep. Agreed. Assume there is no "up" escalator.

RSJ: "Using that definition, there is a hard limit to monetary policy, in that if the government has a deficit of X and an outstanding stock of bonds Y, then no more than X+Y worth of bonds can be replaced with newly created money. Attempts to create even more money are dependent on further increases in government spending."

That's a very wide limit, given current debt/GDP levels. Plus, why stop at buying government debt? Though you would perhaps define buying (say) the debt of commercial banks as fiscal policy? But remember, central banks lend to commercial banks all the time, and that's equivalent to buying their debt.

An alternative definition of "monetary policy" is changing the supply of money. It's the money that counts, not what you buy with it. And I'm fine if you say that some monetary policy is also fiscal policy.


My comment was repeated by Nick Rowe.
There could be a language issue as I am not a native English speaker altough I have studied and taught at English speaking Universities. My point that you did not make sense was not related to English. Sometimes,you have a tendency to be loose in your definitions, assumptions and the hypotheses are unclear and evasive to criticism. First define what is policy, second who decides and acts (behavior) and third what are the rules.Then we can discuss not to score points but help each other to learn!

Putting on my Freud hat...

I think Nick is still peeved that the BoC tightened last week and wants them to immediately jump off the down eleveator.

I'm with ya there man!


"That's a very wide limit, given current debt/GDP levels. Plus, why stop at buying government debt? Though you would perhaps define buying (say) the debt of commercial banks as fiscal policy? But remember, central banks lend to commercial banks all the time, and that's equivalent to buying their debt."

All I am saying is that if you define monetary policy as changing the money supply and it does not matter how, then fiscal policy is subsumed into monetary policy. Of course, any definition is fine as long as it is precise and agreed upon. But if you then define monetary policy to be fiscal policy + monetary policy, then we wont get far in determining which policy is constrained and which is more effective. In that case, fiscal policy becomes observationally equivalent to monetary policy.

How would we determine whether "the quantity of money" is what counts or what is bought with that money counts?

One way would be to assume that a certain amount of spending occurred, and then look to see what would happen if it was entirely money or bond financed. According to you, $X of deficit spending that were entirely bond financed would have a completely different effect on the economy than $X of deficit spending that was money financed. So the definition that I am proposing is useful for determining which policy is more effective. I think that to the degree that you argue that monetary policy is preferable to fiscal policy, you need to define the two policies to be orthogonal.

"But remember, central banks lend to commercial banks all the time, and that's equivalent to buying their debt."

No! CBs lend to banks, yes, but this is borrower driven. The CB cannot decide whether anyone will borrow from it. All it can do is have a policy of setting an interest rate and allowing banks to borrow at that rate *if they want to do so*. The CB does not control the quantity borrowed in this way.

This is different from buying debt instruments on the secondary market. Lending to someone is buying their debt directly, not on the secondary market. You can directly control how much of their *existing* debt you buy from someone else (at indifference prices), but you cannot force anyone to borrow $X from you.

Typical RSJ,

"How we determine whether the "quantity of money"...............money counts?" Another circular point with no meaning!

Definition of monetary policy? where? Discipline!

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