Ben Bernanke's “unusually uncertain” may be for our times what Alan Greenspan’s “irrational exuberance” was to the late 1990s—a phrase that captures the dominant mood without providing much policy guidance.
As dissent continued to rise in the ranks of the usually united Federal Reserve Board, unusual uncertainty reigned supreme at the annual Jackson Hole meeting. While the Reinhart-Rogoff thesis that downturns induced by financial collapses differ significantly from traditional cyclical downturns was broadly accepted, there was no agreement on their generalization (based on a large number of historical cases) that public debt-to-GDP ratios above 90 percent necessarily slow economic growth. Indiana University economist Eric Leeper’s call to focus more on fiscal challenges induced by demographic shifts was challenged by CBO director Doug Elmendorf (not exactly a fiscal dove himself): “Fiscal policy is intrinsically about distributional choices. … There is no scientific basis for saying how large the government deficit should be—any more than what my level of savings should be.”
As a non-economist and puzzled citizen, I find Elmendorf’s statement astounding and disturbing. Is it really true that we can say nothing valid about the relationship between the size of deficits in specific circumstances and the level of economic activity? If so, what is the basis for supporting (or, for that matter, opposing) fiscal stimulus during downturns? To say that the issue is “distributional” means that fiscal policy affects how the pie is divided, not the size of the pie. If so, the conservative critique would seem to have some merit: A “stimulus package” simply takes away from some groups and gives to others—usually core members of the political majority. (This is not to say that the distributional consequences of fiscal policy—or any other policy—are matters about which we should be morally indifferent.)
What makes this episode so baffling is that, less than a month ago, the CBO published an Issue Brief (with Elmendorf’s signature affixed) entitled “Federal Debt and the Risk of a Fiscal Crisis.” The minimally alert reader will find the following on the first page:
Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. … A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur.
A bit later on, but still on the first page, we read:
[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates.
I can’t speak for anyone else, but to me these two quotations (and there are many others to the same effect) don’t sound like “distributional” observations. They are, rather, predictions about the consequences of excessive debt accumulation for the performance of the economy as a whole. If so, what’s the basis for Elmendorf’s disagreement with Leeper?
I may be making too much out of quotations drawn from much more extensive discussions. Or my emphasis may be wrong. If Elmendorf’s point is that fiscal policy can’t be conducted with “scientific” precision, who would disagree? It involves complex judgments about quantities, timing, and the responses of key actions in specific situations that are bound to have some unique features. The challenge is to get the broad thrust of fiscal policy pushing in the right direction at the right time, which means assessing the shifting balance between risks and opportunities. That’s what I took the CBO’s July Issue Brief to be doing.
We may well be in a Bernankean moment of unusual uncertainty, but there’s no need to make it worse with superfluous uncertainty. Will the real Doug Elmendorf please stand up and clarify?