Beware the fair-weather fiscal friend

As I’ve discussed before, a change is in the air for fiscal policy. The FT has done a mea culpa and said “the aim of balancing the budget can, at least temporarily, be dropped.” This is good news for those who have waged the long and lonely war against the fiscal hawks, but I want to urge caution about over-interpreting the new shift in fiscal policy.

There are two ways ideas can shift. First, the assumptions and/or internal logic of an idea can be rejected wholesale; the idea’s core can be negated. Ptolemaic astronomy, which held the Earth was the center of the universe, is gone without reservation, caveat, or condition.

But ideas can also change in a more gentle fashion. The core remains, and where it fails to explain, special caveats, a long list of “buts” “ifs,” and asterisks, are appended. Circumstantial reasons are proposed for why the idea does not work; perhaps the idea only works in “normal times,” and today is not; perhaps it only works when people behave a certain way, and today they are not. At some point, it is presumed, reality will again dance to theory’s tune.

This second type of change is fragile and skin-deep. The special conditions and circumstances can be jettisoned to reveal the original core. If Ptolemaic astronomy were only wrong because we were temporarily passing through a heliocentric phase, we should not be surprised to see its advocates return once they deemed the phase over.

Much of the change in fiscal policy is of this second kind. Exceptionally low interest rates, overextended monetary policy, and a pandemic induced slump are special circumstances that temporarily waive the normal logic, but they do not challenge it. The logic of balanced budgets and restrained fiscal policy still holds in “normal times” (oh those halcyon days!), we are just living through a special period that allows us to temporarily deviate from the optimum.

This colors the attitude of new converts to other parts of the consensus. As the FT’s article makes clear, a temporary shift in circumstances is no reason to change other parts of the consensus, for example changes to central banks are out of the question – “The facts have changed, but not everything else should.”

The danger is these temporary changes can be reversed quickly, at which point the old logic lurking in the background will return in force.

We should not be naïve about these processes being purely fact-based. Facts do not speak for themselves, and interpretation is complex. The US fell below estimates of full employment in 2015, but it took another four years for the Fed to change its approach to unemployment. The FT made much about sensible people changing their minds with the facts, but as Robert Skidelsky’s letter makes clear, the facts haven’t changed, it is only the FT’s interpretation which has.

Low rates, low growth, and low inflation have relaxed many of the distributional and political tensions around macroeconomic policy, and made this entente possible. Subdued inflation has allowed the financial sector to acquiesce to expansionary policy, but do not expect that to last should it pick up again.

Take last week’s fiscal framework from Orszag, Rubin, and Stiglitz (here). While they agreed on what should be done now, they were divided about the post-recovery period – “once we’re at full employment” (never mind that no one knows where it is). Rubin trotted out the warning he has been telling for thirty years, about how out-of-control US debt will cause a crisis of confidence, and a massive currency crisis. Never mind that the opposite has happened. He sounded like the old Marxists, who, when asked why the forces of history had not yet delivered the inevitable revolution, would say “just wait.”

It is a good thing that fiscal policy is experiencing this renaissance, but we should remember that many of its new friends are fair-weather.

Out with the old, in with the new?

From a 1994 conference on monetary policy, this quote from the famous Paul Samuelson:

I am reminded of a similar sentiment expressed by Nietzsche in Beyond Good and Evil:

That which an age feels to be evil is usually an untimely after echo of that which was formerly felt to be good – the atavism of an older ideal

Unprecedented?

Regular news readers may have noticed the growing usage of the word ‘unprecedented.’ A quick Google reveals pages upon pages of recent news articles featuring the word. I caught myself using it twice within a single paragraph the other day.

The feeling that we live in interesting times is not novel and the vividness of subjective experience probably means that each generation experiences their reality as exceptionally saturated and consequential.

This need to be weighed against the idea that modern life, the period following the industrial, scientific, and democratic revolutions of the 17th and 18th centuries, is fundamentally different from what came before. Life has accelerated and rapid change has become a norm, so perhaps unprecedented is not hyperbolic.

To look a little closer, I decided to search for the word with Google’s Ngram Viewer. For those not aware, it allows you to search for specific words or groups of words (Ngrams) within Google’s enormous corpus of digitized books, stretching back to 1800.

Unprecedented

A few descriptive points stand out:

  • Three peaks in 1807-1815, 1911-1919, and 1938-1946
    • Roughly corresponding to the Napoleonic Wars, World War 1, and World War Two.
  • A long-term decline between the 1830s and 1910,
    • Roughly corresponding with the end of the first industrial revolution, the duration of the second (there were several), and the peak of European colonialism.
  • A rapid incline between 1910 and 2003.
    • The ‘modern era’
  • A decline and plateau from 2004 to the present.
    • The post-crisis world? Aka my adulthood.

A few things stand out for me:

  • Economic crises do not seem to attract the same notice as wars. All the large spikes correspond with exceptionally violent conflict. The Great Depression, The Great Inflation of the 1970s, and the GFC are either plateaus or minor inclines. Alternately, no economic crisis has been as devastating as the Napoleonic, First, and Second World Wars (give thanks).
  • A plausible explanation for the incline between 1910 and 2003 could be rapid technological progress. But then why the decline in usage between 1830-1900, when railroads and telegraphs were revolutionizing communication and transport?
  • Despite historically high absolute levels of usage, I was surprised by the decline in usage since 2004, amidst the biggest economic crisis in a generation

All this speculation could be meaningless if I was only capturing changes in word popularity, so I also searched possible synonyms

In comparison with its synonyms, unprecedented has maintained its currency in usage.

Unfamiliar does not seem to have been used prior to the 1850s, but tracks a steady incline from its introduction until the 1990s when it explodes. The use of unfamiliar would support an explanation emphasizing the pace and novelty of technological progress since the industrial revolution, but why have both words dropped off in the 2010s?

And yet, a technological explanation needs to confront the fact there has been a steady decline in the usage of the word ‘new’ since the 1950s.

In all likelihood, variation in usage reflects subtle differences in meaning between synonyms or changes in writing style. While we can imagine a battle with an ‘unprecedented’ death toll, it is unlikely to be ‘unfamiliar.’

Still, there are some interesting anomalies, like why the GFC seemed to elicit a comparatively tepid response.