There were two posts yesterday. The first was “Taylor’s Rule on Fiscal Policy:”
OK, in general I try not to do gotchas of the form “you say this, but you used to say that”. But I just happened to run across John Taylor’s latest, and it was just too funny not to mention.
So, Taylor now says that we should not cite falling spending by state and local governments as a reason for the weak recovery. Why? Because, he says, such spending is endogenous: state and local governments cut spending in line with revenue. Basically, they’re cash constrained; so what can you expect?
But wait: Taylor has prominently argued (pdf) that the Obama stimulus, and specifically the part that involved aid to state and local governments, was ineffective, because the state and local governments just used the money to pay down debt — that is, giving them more cash wouldn’t have mattered.
I’m sure that Taylor will come up with some reason these statements aren’t diametrically opposed. But from here it looks like the Taylor rule on fiscal policy is that Obama is always wrong, and that state and local governments are either cash-constrained or not cash-constrained, depending on which assertion is needed to back up that position.
The second post of the day was “Inflation Nation Not:”
Brad DeLong has a fairly long, intricate piece keying off what looked like a prediction by John Cochrane, early in the Great Recession, that the Fed’s expansion of the monetary base would lead to high inflation. Brad spends a fair bit of time on various excuses — was it really a prediction? — but I think that’s beside the main point, which is that all the people predicting high inflation four years ago were right to do so, given their models. And the lesson of low inflation — a lesson most of them refuse to learn — is that their models were wrong.
Basically, many people on the right had and have a supply-side view of the slump. This comes in different versions: there’s the view that unemployment benefits and Obamacare are reducing labor supply; there’s the Austrian view that the bubble left us with the wrong capital structure; I suspect there are other versions I’m missing. But under any supply-side interpretation, the Fed’s decision to respond by trying to pump up demand, which it has done by vastly increasing the monetary base, ought to have been inflationary.
Of course it wasn’t — which is what people from my side of the argument predicted in advance, because we recognized that collapsing demand had pushed us into a liquidity trap in which the Fed’s problem was lack of traction, not inflation.
The disappointing thing is, as I’ve already suggested, that almost nobody has been induced by this dramatic failure of prediction — or the similar error on interest rates — to change views, and possibly even concede that the Keynesians might have a point.