The idea of crowding out mentioned here appears to have made some uncomfortable. On the face of it, people may feel that this sort of conclusion would mean that I agree with this sort of statement from Neil Ferguson (I don’t):
You can’t be a monetarist and a Keynesian simultaneously—at least I can’t see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.
And it might give the inference that I disagree with Sumner here (I don’t):
I hope other bloggers will adopt DeLong’s enlightened approach. Then we might finally be able to have a sensible debate over fiscal policy, instead of a inane shouting match between intellectually bankrupt “paradox of thrift” arguments and empirically unfounded “crowding out” arguments.
When I mentioned crowding out in that context, I was merely saying “hey, increased government demand is increased demand” … I was arguing against the idea that is publically being taken from MMT (although I am sure the authors are being a bit more careful) that for some reason a higher deficit would lower interest rates, and the fact that in trying to make themselves seem different from the mainstream MMT authors appeared to be willing to let this mistaken view become accepted.
[Note: The argument they seem to have is that, if you increase the deficit AND then expand the money supply to accommodate it, you can lower interest rates … this is a different issue again, and requires a bit more of a description regarding the impact on inflation, which mainstream economics does through the central bank reaction function and inflation/NGDP target]
I emailed James about the Neil Ferguson piece saying the following:
Look at this. Yar, an increase in G-T increases the term structure of real interest rate relative to where it would be, which in turn suggest that the central bank will indicate policy that involves a higher nominal interest rate to meet its inflation target. But in terms of “stimulus” it doesn’t mean they are fighting – just that eqm interest rates are higher. The Fed isn’t trying to “make interest rates lower” it is trying to meet its inflation target in the face of a negative demand shock.
This is consistent with the idea that, outside of the ZLB on interest rates central banks do fully offset the “demand” implications of fiscal policy (making it an issue of efficiency vs equity when choosing the size, scope, and actions of government). When at the ZLB, and faced with the central bank that refuses to do anything, the fact that the government pushes up the “inflationary non-accelerating interest rate” by increasing its deficit is the very mechanism by which the stimulus is seen as “effective”.
As Sumner says in the aforementioned post, the “multiplier” associated with the deficit can be seen as an estimate of central bank incompetence – although I prefer to use the term central bank “conservativism” in the face of uncertainty.