Matt Yglesias has a new post where he argues that a single-payer system is inevitable in America, as achieving universal coverage under a mixed public/private system (as in much of Europe) requires buy-in from both parties. Because the GOP will try to “dismantle” any Obamacare type system (to use President Trump’s terminology), only a single-payer system would have any staying power:
There are lots of alternatives based on subsidies and regulations that work in principle and are used in practice in many European countries. But in a democracy, a workable regulatory system needs to be able to survive the regular alternation of parties in power. The lesson of the Trump era is that the Obamacare approach can’t do that. It’ll take a big, dumb program that just keeps trundling along unless Congress actually repeals it — like how Social Security checks keep going out no matter who’s president.
It occurs to me that this argument applies even more strongly to Keynesian fiscal policy. Many non-economists do not understand fiscal policy; they view it as something that can be applied on a sort of ad hoc basis. But things don’t work that way, as Keynesian fiscal policy requires a countercyclical (full employment) budget deficit. It’s a full-fledged policy regime that must be maintained over time, not a gesture to be employed at a point in time. You can’t say “let’s do fiscal policy this year”.
Back when the unemployment rate was 8% in January 2013, the GOP suddenly cut the budget deficit in half, from a bit over $1 trillion to a bit over $500 billion. More recently, unemployment has fallen to 4% and they have gone on a deficit spending spree that is unprecedented for a period of peace and prosperity, with the budget deficit expected to reach nearly $1.1 trillion in 2019. (This is contrary to the prediction of the more enthusiastic supply-siders.) This sort of highly procyclical deficit is exactly the opposite of what the Keynesian model calls for.
Unfortunately for those Democrats who favor Keynesian policies, fiscal stabilization policies only work if both political parties buy into the program. Because the GOP does not, fiscal policy is now completely off the table.
A few years back I had an extensive debate with Keynesian economists over the question of monetary offset. I argued that fiscal stimulus (and austerity) was generally offset by countervailing monetary actions. Today, the validity of my monetary offset argument is a moot point. Keynesian fiscal policy is dead (even if the Dems were able to regain power), and thus whether we like it or not we are now completely reliant on the Fed to create a stable path of nominal spending.
PS. Monetary policy is also a regime, not a gesture. Commenters will occasionally suggest that I “favor using monetary policy during a recession”, which is a meaningless statement. I favor using monetary policy 100% of the time, because I think barter is a really clumsy system. I don’t want to bring a bag of apples to the store, to swap for peaches. Those of us who oppose barter can then have an intelligent conversation about what sort of monetary regime we favor, but that conversation will not have anything to say about “using monetary policy during recessions”.
PPS. I would not even say I favor using expansionary monetary policies during recessions. I always favor a stable monetary policy aimed at keeping NGDP growing along a 4% trend line. That policy is neither expansionary nor contractionary.
READER COMMENTS
Benjamin Cole
Aug 5 2018 at 12:08am
Carney at the BoE recently coined a snappy phrase in regards to monetary policy: “Walking to stand still.”
A pithy expression that sums up monetary policy neatly.
A 5% NGDPLT is probably the best guidepost, though perhaps 2%-4% IT-band would accomplish much the same (and may allow some paying down of the national debt through inflation).
Still, orthodox macroeconomists are dodging the big questions.
Okay, we have US federal budget deficits to the moon from now on. Take that as a given, and sermons that we need to cut the national debt are useless. As recently pointed out, these are not Trump deficits—these are Congressional deficits, voted on by both houses and parties.
So…does QE offset growing national debt?
What can we learn from the Japan experience? After all, what is happening in Japan is not a theory, it is a real-world fact. The BoJ now owns 45% of the national debt, and they have under 1% inflation, and may always have under 1% inflation from what I can tell. The markets say the BoJ has a losing battle on its hands to get to 2% inflation.
Life will be easier on taxpayers if the Fed can simply buy back a sizable amount of national debt, no?
Helicopter drops instead of issuing mountains of new debt, especially in the next recession is another option, and worked in Japan in the Great Depression, and may have worked in China, post-2008. (It is thorny trying to figure out that the PBoC does with sour loans). We know that China largely sidestepped the Great Recession, and kept growing, GDP-wise.
I hope to see more blogs from the Sumners, Krugmans, Cochranes, et al that start with this premise: We have federal budget deficits to the moon written into our policy-making DNA. We will see crushing debt burdens ahead, unless we devise some options.
In this undeniable reality and future, what should monetary, or monetary-fiscal, policy be?
Is “monetary offset” enough, if crushing debt burdens lead to collapse?
Can QE as debt relief work? What about helicopter drops?
Matthias Goergens
Aug 5 2018 at 11:06am
Benjamin, there might be lots of debt, but why does it have to be crushing?
Benjamin Cole
Aug 6 2018 at 10:11am
Matthew:
Well, your question is my question somewhat. Can we engineer helicopter drops or QE to avoid crushing debt burdens?
For example, even if the Fed shoots for 4% NGDPLT, perhaps that could done through 1) lower interest rates, or 2) through larger QE and not-so-low interest rates. The second option has the benefit of being debt relief.
Or 3) relatively higher interest rates side-by-side with helicopter drops.
You may mean that no matter how high the national debt is, it is not crushing, as we owe it to ourselves (but we also owe China and Japan).
But it seems to me that eventually debt burdens will call for higher taxes. I suppose you could argue for a national Ponzi scheme of sorts, and we borrow more money to pay off earlier investors.
Seems to me, given that the Congress will always run large deficits (remember, that is the premise of my question), probably about $1 trillion a year, we should look for ways to pay the national debt down, possibly through a combination of inflation and QE, and helicopter drops.
China and Japan are doing this (or have done so), so I am not posing an exotic theory. Though I might as well be from the Moon for all the reception these ideas, battle-tested elsewhere, get in the US.
Philo
Aug 5 2018 at 11:25am
If the Democrats, when in power, tried to institute a counter-cyclical fiscal regime, while the Republicans, when in power, tried to institute a pro-cyclical one, and the two parties alternated in power, could we not describe the result as a “regime” of sorts? Or are you building some sort of time consistency into your notion of a “regime”?
Note that one party or the other might keep power for a fairly long stretch of time. Suppose the Democrats gained power and instituted countercyclical fiscal policy which they kept in place for (say) twelve straight years: would that not amount to a “regime,” even if the Republicans then finally regained power and changed over to procyclical fiscal policy? (I presume regimes don’t have to last forever.)
(But, really, I doubt that the Republicans are actually committed to pro-cyclicity, or the Democrats to counter-cyclicity.)
Scott Sumner
Aug 5 2018 at 11:58am
Philo, Yes, that would be a regime, but not a Keynesian fiscal regime. You can’t just turn that sort of regime on and off.
Iskander
Aug 5 2018 at 7:54pm
How is it that fiscal policy boosts NGDP?
By raising interest rates therefore boosting velocity?
I can see that with a interest rate targeting CB any fiscal policy which raises the natural rate will lead to monetary expansion. But then we are back to Monetary policy.
JP
Aug 5 2018 at 8:38pm
“But things don’t work that way, as Keynesian fiscal policy requires a countercyclical (full employment) budget deficit.” Surely this is a typo right? Keynesian fiscal policy requires a budget surplus during full employment and a budget deficit when the economy is not at full employment.
Michae Byrnes
Aug 6 2018 at 6:53am
Bush 41 and Clinton – Keynsian fiscal policy’s last gasp?
Scott Sumner
Aug 6 2018 at 11:45am
Iskander, Fiscal policy probably has little or no demand side impact, due to monetary offset. Of course supply side fiscal actions can boost RGDP, and thus NGDP if the Fed is targeting inflation.
JP. I meant the deficit would be countercyclical (large deficits when output is low.) You are correct that the fiscal balance would be procyclical. I was considering the deficit as a positive number, but your approach is more technically correct.
Michael, Yes, although Obama tried to revive it in 2009.
Thaomas
Aug 6 2018 at 11:52am
Quite Likely
Aug 6 2018 at 12:28pm
Seems like the main recommendation to take away from this is the need for automatic stabilizers rather than hoping for Congress to pass fiscal stimulus at the right time. This is of course where the MMT job guarantee proposal shines: have stimulus come in the form of government jobs at a living wage for anyone who wants them, meaning government stimulus spending will naturally go up in recessions as people lose their private sector jobs and take job guarantee positions, and go down in boom times as they’re lured out of those job guarantee positions by higher wages in the private sector.
Scott Sumner
Aug 7 2018 at 1:33pm
Quite, No, the takeaway is that we need a sound monetary policy; automatic stabilizers will not do the job. MMTers would be better off focusing on NGDP targeting.
Andrew_FL
Aug 8 2018 at 9:59am
The implication of this seems to be that you view the very existence of money as a “policy” which only makes sense if you think money cannot exist without the State. This is incorrect.
Scott Sumner
Aug 8 2018 at 11:53am
Andrew, If money were privately produced, presumably the producer would still have some sort of policy controlling money. Thus Bitcoin has a policy of limiting production to about 22 million coins, and regulating increases in supply according to the ability to solve mathematical problems.
TMC
Aug 8 2018 at 12:45pm
Good post, and I hope your wishes come true.
Quibble: ‘and they have gone on a deficit spending spree that is unprecedented for a period of peace and prosperity’ Only if your memory goes back to only 2013. 2011 and 201 we peaceful and positive grow with similar deficits. If it’s the debt you are worried about, and it probably is, 2016 was a bad year with it rising 1.4 T.
I agree that with things like this, we should be running surpluses.
As for Matt’s concerns, why go full socialism? Trump recently has been pushing for more transparency in Hospital pricing. An actual marketplace in medical might do wonders for healthcare. Baby step in the right direction. http://dailycaller.com/2018/08/06/hospitals-post-prices-rule-trump/
Todd Kreider
Aug 8 2018 at 1:42pm
Scott Sumner:
” I always favor a stable monetary policy aimed at keeping NGDP growing along a 4% trend line.
First, why does Japan need a 2% rate of inflation? Its GDP per capita grew at at 2% from 2003 to 2007 prior to The Great Thud and its overall GDP per capita has been around 0.8% since 2000, almost identical to the U.S. despite Japan having long stretches of mild deflation.
Second, how does one come up with keeping NGPD growing at a 4% trend? I assume based on the past performance since 1950?
Third, China did not escape The Great Recession as growth fell from 9% a year to closer to 6% / 7% a year.
Jerry Brown
Aug 9 2018 at 12:09am
Yeah I question that too Todd. I think a large part of a desire for a positive inflation rate is that wages are ‘sticky’ downwards. So if a firm finds it has to cut costs for some reason, like a recession, it is really difficult to actually cut the wages of employees without them either quitting altogether or really getting pissed off about it and having that affect their productivity. So if there is inflation, a company may be able to just not give a raise and that will in effect, lower their real costs maybe while avoiding some of the worse effects on morale.
I don’t know why Scott picked 4% for NGDP target though. Maybe that is just for Japan which has a declining working age population. He once told me he thought 4.5% might be appropriate for the US I think. I’m more with Ben in thinking higher target like 5+. But that has nothing to do with the national debt which I don’t worry about at all.
Todd Kreider
Aug 9 2018 at 2:30am
This is specific to Japan but Japanese are much more likely to cut hours than to lay off workers. That is the major reason Japanese unemployment reached 5.5% at its peak in 2009 instead of 10% in the U.S.
I just think it is funny how some American economists have said how bad Japan’s mild deflation has been when growth has been the same as the U.S. which has had ‘normal’ inlation since 2000.
Max Goedl
Aug 12 2018 at 1:08pm
What exactly are you claiming about US fiscal policy: that it wasn’t anti cyclical in the past or that it isn’t going to be in the future?
The first claim is very hard to maintain looking at the actual data from the past 5 decades: https://fred.stlouisfed.org/graph/fredgraph.png?g=kQkp. It’s hard to draw a more beautifully anti-cyclical pair of curves if you had to make them up!
Hazel Meade
Aug 15 2018 at 10:10am
A single payer system would have no staying power at all in America, for the simple reason that American’s aren’t going to tolerate what single-payer actually means: a ban on private payments for medical services.
Most Americans, including those who advocate “single payer” have no idea that single payer means exactly what it says – only the government can purchase medical care on behalf of it’s subjects, the people are legally forbidden from going outside the system to buy it themselves. They have no idea private medical care and private medical insurance is effectively illegal in Canada. There is no parallel private system that people can opt out into. If they understood that’s what it meant, they would not support it. And of course the reason why that is the case is that if they could legally buy private medical care, many people would “line jump” by paying doctors more outside the system, drawing medical resources into the private market and away from the public system. The single payer system in Canada really means that government has an absolute monopoly on medical care, and most people don’t realize that. They think single payer sounds good because they just think it means free medical care for all. They don’t actually understand the details of what it entails.
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