First Principles of Fiscal Policy, with Some of Their Practical Applications

My Godley-Tobin Lecture at the Eastern Economic Association. It has turned out to be a full-throated defense of Federal Reserve monetary policy in the 2020s: moving late & moving fast has been...

My Godley-Tobin Lecture at the Eastern Economic Association’s annual meeting at the Sheraton Times Square hotel, New York, New York…

It has turned out to be a full-throated defense of Federal Reserve monetary policy in the 2020s: moving late & moving fast has been remarkably successful ex post, and was certainly much more than defensible as a strategy ex ante. We are very lucky to have had Jay Powell, his committee, and his staff in the hot seats so far this decade.

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Whether the Biden administration & the congress made a major mistake in 2021 with the American Rescue Plan and thus dealing the Fed a more difficult hand—that is a closer question, but I still come down on the side of no ex ante, although clearly yes ex post.

There remain two big questions:

The first is: Was the inflation of the first third of the 2020s was a bad thing, or a good thing—avoiding the worse outcome of possible recession and a return to secular stagnation on the one hand, and an essential component toward a very desirable sectoral and industrial reörientation of the American economy into a more productive configuration? I think that the balance of the evidence is that it was a good thing for all those reasons.

The second is: Are the political consequences of inflation—that it annoys every voter, and makes them all conclude that the government is not competent to fulfill its macroeconomic managemetn contract with the public—sufficiently bad to override the production-economics benefits of the inflation we just experienced? This question, I think, is in close balance. But I have been impressed by the fact that only voters misinformed about the economy broke for Trump, while voters who knew what was what for others as well as for themselves broke for Harris by large margins.