How To Use Fiscal Stimulus To Stave Off The Next Recession

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, you know one of the big things that we've been talking about, maybe a little bit on the podcast, but I would say finance media, eco media in general, is this idea of the monetary to fiscal handoff.

Tracy Alloway (0:34)

Oh yeah, that is the big theme, and it's sort of the big thing that a lot of people are hanging their hopes on for economic growth. So the spiel that you've been hearing a lot is that monetary policy has failed in various ways to lift inflation and to boost economic growth in a significant way.

And so it is now up to the government side to actually enact fiscal stimulus and do it that way.

Joe Weisenthal (1:00)

Right, I think there's like a couple of things going on. I mean, I think A, there's the fact that people have been pretty disappointed with the pace of growth in the wake of the financial crisis. There's the fact that in much of the developed world, there may literally, according to some people, be no further scope for monetary policy as rates are more or less pinned at zero. So even if things are OK now, there's this expectation that central banks don't have a lot of juice.

And something that we have talked about, just this idea that in the wake of the financial crisis, growth aside, that all of the old rules and old frameworks are being questioned once again.

Tracy Alloway (1:44)

Yeah, I think that's right. But of course, I guess the key thing in all of this is that it's not central banks who are going to be responsible for the next phase. It's governments, right? And with governments, you tend to get a hefty dose of politics and often disagreement.

Joe Weisenthal (2:02)

Right. That's the tricky part, because one, in theory, nice thing, and it's debatable whether it's nice, but one, in theory, nice thing about relying on monetary policy is it can be conducted by ostensibly independent institutions that don't have to go so much by political whims or worry about getting reelected. Whereas when you rely on fiscal policy, you rely on elected officials, often who have counter goals to each other. Maybe politicians don't want to boost the economy when their opposition is in power, things like that.

Fiscal policy arguably reacts much slower. So although it sounds nice to have a handoff, so to speak, it's a lot trickier than just saying we need to rely more on fiscal policy.

Tracy Alloway (2:52)

Yeah, which is why it's... What is it? Oh, it's 2020 now, and we're still talking about the possibility of a big round of fiscal stimulus in a lot of places, even though it feels like we've been talking about it for a long time.

Joe Weisenthal (3:06)

Right, and even in places which every economist almost in the entire world would say, yes, please spend more money. A good example of that would say be Germany. It just doesn't matter. It's so much more arbitrary and unpredictable when you're going to get the fiscal response than say monetary policy, which can be adjusted extremely quickly.

Tracy Alloway (3:28)

And this is something that I remember we spoke about with Lord Robert Skidelsky. He was talking about the need for a sort of automatic fiscal stabilizer that could kick in when the economy was in trouble and sort of bypass whatever political gridlock might otherwise stop it from happening.

Joe Weisenthal (3:50)

Well, that is a perfect way to introduce our guest, because our guest has been doing work on exactly this question. So how do you get fiscal policy to work in a timely manner, in a predictable manner, in a matter that's not as much about the political cycles, in a manner that's actually well targeted, and time to avoid or mitigate the effects of recession? And that is going to be our discussion today.

Claudia Sahm (4:21)

Great. I can't wait.

Joe Weisenthal (4:22)

All right. So without further ado, I want to bring in Claudia Sahm. She is the Director of Macroeconomic Policy at the Washington Center for Equitable Growth.

And Claudia, thank you very much for joining us.

Claudia Sahm (4:35)

Yeah. Thank you for having me on the show. I'm really excited.

Joe Weisenthal (4:39)

Awesome. Well, before we get into your work, and we've talked about this work you've been doing in terms of improving the speed and efficacy and predictability of fiscal policy, just tell us a little bit about your background. You were at the Federal Reserve for a long time, right?