Re: Stiglitz on central banks

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L] Stiglitz on central banks

Brad DeLong writes:
> Liberal Keynesians buy the "crowding out" argument under two sets
> of circumstances: (i) if the economy is at full employment, and (ii)
> if the central bank has a target unemployment rate, and responds to
> plans for fiscal stimulus by raising interest rates enough to
> neutralize the effects of fiscal policy.
>
> But today neither of those apply. And even this card-carrying
> neoliberal Keyensian wants a bigger deficit for the next 24 months.
> (But budget surpluses four or more years out.)

Is it reasonable to assume that the central bank can always (or ever) attain its target unemployment rate?

Further, why is it that Stiglitz seems to accept the crowding out argument?

BTW, have you ever noticed how the fiscal conservatives stress the "crowding out" effect of fiscal deficits on private investment (and long-term growth of potential real GDP) but forget the "stomping out" effect of tight monetary policy (e.g., the early 1980s) on private investment (via both interest-rate and accelerator effects), which also hurts long-term growth? (This works even if we ignore Verdoorn's  Law, i.e. that sustained high demand and low unemployment encourages growth of potential.)

Similarly, they forget the fact that "balancing the budget" (or attaining a fiscal surplus as Clinton did) may involve cutting government fixed investment (in infrastructure, education, public health, basic research, etc.), which has exactly the same negative effects on long-term growth that either crowding-out or stomping-out of private fixed investment does? (In addition to the direct effect of slowing the growth of the government's capital stock, all else constant balancing the budget or running a surplus deters private investment via the accelerator effect.)

Jim