Mervyn King and the Fiscal Multiplier
Lars Christensen stated recently that for Europe “the fiscal multiplier is zero if Mario says so“. The debate about the impact of fiscal stimulus in the UK is similarly predicated on the central bank’s response. It’s rather insane that we must be forced to have this debate about that hypothetical situation.
If the MPC wanted – or would tolerate – faster demand growth, but feel they were unable to provide it using monetary policy, why don’t they just come out and say that? The government has picked a bunch of the best economists available to run our AD policy. They are just civil servants; the ultimate technocrats. If they think fiscal policy could be used to provide better outcomes for the
macroeconomy people they serve, why are they not shouting it from the rooftops?
So I was glad to see that Ben Chu came out and hit Mervyn King with the question du jour in the Inflation Report press conference earlier this month. What’s the impact of fiscal tightening on demand, Merv? My emphasis here:
Ben Chu, The Independent: Governor, in your opening remarks you said that there were two major factors behind the fact that the recovery has been less healthy than we hoped for – the credit squeeze and high commodity prices. But what you didn’t mention was the fiscal tightening that’s been put in place. I was wondering what your view is on the effect of that fiscal tightening on the pace of the recovery? And also if you could give us an insight into the view of the MPC as a whole on what impact the level of tightening has? I’m thinking particularly of the infrastructure cuts which were quite high last year.
Mervyn King: Well I don’t think the Committee has formed detailed views about particular aspects of public spending. Of course the fiscal consolidation is a dampening effect on demand; that’s clear. And that’s why we need a rebalancing where you’ve got expansionary monetary policy and a weaker exchange rate boosting exports, offsetting the dampening effect on demand of the fiscal consolidation. But the point I was making was that we knew that two years ago, and there hasn’t been any significant news since then.
“Offsetting” – the Sumner Critique reduced to a single verb. (MPC Kremlinologists might pick up on the use of the word “need”, implying that King thinks we “need” expansionary monetary policy but haven’t got it. That would be not be consistent with anything else he says, so let’s presume he is using it in the less formal sense.)
Indeed, Mervyn King has been consistently hawkish on fiscal policy; cautioning against more deficit spending in March 2009, and was subsequently widely criticised when calling for a “clear and credible” plan to reduce the deficit during 2010 and beyond. Obviously, the Governor does not represent opinion of the whole MPC – and Adam Posen is surely a deficit dove.
It remains very hard to find a strong indication that the MPC want faster demand growth right now. Any time they do see the need for faster demand growth, they QEase. Who really believes they work any other way? And Spencer Dale seems to be setting himself up as the resident hawk:
“Monetary policy at the moment is very stimulatory,” Mr Dale told BBC Radio Scotland. “We have undertaken a large amount of quantitative easing and that will continue to flow through the economy.”
Mr Dale said: “We expect to see a gradual recovery in growth this year. We have seen inflation drop from 5pc to 3pc, but we need to get it down further. The case for QE going forward will be affected by the balance of those two risks.”
Never mind the economy – let’s disinflate! Fiscal stimulus? Good luck with that.