Mostly for non-macroeconomists.
I first learned macroeconomics in the very early 1970's in the UK. I learned that the macroeconomy was not automatically self-equilibrating, and that the government should use fiscal policy to target "full employment" (aka "potential output"). The government should loosen fiscal policy when the economy was below potential and tighten fiscal policy when the economy was above potential. We didn't pay much attention to monetary policy. And we didn't pay much attention to inflation either, at least in the models, though it was getting harder and harder to ignore in reality. I think we hoped for what we would nowadays call "Divine Coincidence": that if we were successful at targeting "full employment" then inflation would take care of itself. And if it didn't, then maybe we needed some additional policy lever, like wage and price controls.
Let's call that "Old Keynesian" fiscal policy. Many people will still think of "Keynesian" fiscal policy as something like that.
But times change.
I used to be a New Keynesian, until the recent recession. (I still am a bit of a New Keynesian, just like I still am a bit of an Old Keynesian, if the moon is full, and I hear the ancestral spirits calling me.) So it's very easy for me to pretend to be a New Keynesian.
New Keynesians believe that the macroeconomy is not automatically self-equilibrating, and that the central bank should use monetary policy (interpreted as setting a rate of interest) to target inflation. (Though some New Keynesians are recently moving away from inflation targeting.) The central bank should raise interest rates if it forecasts that inflation will otherwise rise above target, and lower interest rates if it forecasts that inflation will otherwise fall below target. Simple New Keynesian models have Divine Coincidence: if the central bank is successful at targeting inflation, then employment and output will take care of themselves.
New Keynesians (with an exception I will come to later) see fiscal policy as unneeded for macroeconomic stabilisation, and therefore useless for macroeconomic stabilisation. If the government loosens fiscal policy, and if this would increase Aggregate Demand and inflation if the central bank did nothing in response, then the central bank will do something in response.
Canada is a New Keynesian country. The New Keynesian perspective is baked into our institutions. The Bank of Canada is held accountable for keeping inflation at the 2% target. If the Bank of Canada sees a change in fiscal policy that would change AD away from where it wants it to be, and thereby change its forecast inflation away from 2%, then it will respond to fully offset that change in fiscal policy. It does not matter whether the Bank of Canada's forecast of inflation is correct or not. The only thing that matters is that the Bank of Canada thinks its forecast of inflation is correct.
We saw a clear example of monetary offset in the mid 1990's. Fiscal policy tightened a lot, the Bank of Canada loosened in response, and there was no recession and inflation stayed roughly on target. And Canada is not the US. Canada is a small open economy. The exchange rate matters as much if not a lot more than the interest rate. We dare not say the Bank of Canada "depreciates" the exchange rate to loosen monetary policy, but we dare say that the Bank of Canada does not prevent the exchange rate depreciating when monetary policy needs to loosen. (Saying it that second way doesn't antagonise the cousins so much.)
There is one exception to the New Keynesian view that fiscal policy is unneeded and therefore useless for aggregate demand stabilisation. That exception is the Zero Lower Bound on nominal interest rates, where the central bank may be either unable or unwilling to use "unconventional" monetary policies to keep forecast inflation on target and offset fiscal policy changes.
Let me assume that is the case (for the sake of argument).
According to (simple) New Keynesian models, a (perceived) permanent increase in government spending will not help the economy escape the Zero Lower Bound. The fiscal multiplier in that case is zero. But a (perceived) transitory increase in government spending will help the economy escape the ZLB. The government increases spending above normal at the ZLB, and reduces it back to normal immediately after the ZLB is past. The fiscal multiplier in that case is one. And bringing forward government spending from the future into the present will help even more. The government increases spending above normal at the ZLB, and reduces it below normal (at least temporarily) immediately after the ZLB is past. The "preponed" government spending multiplier is two. Read my crappily written old blog post if you want to maybe understand why. [Update: plus, unlike the transitory increase in government spending, preponing government spending leaves the debt/GDP ratio unchanged when it's all over, so tax rates don't need to rise to service a permanently higher debt/GDP.]
When I look back at Canadian fiscal policy over the last few years I see something that looks very close to an application of the preponed government spending multiplier idea. It was very New Keynesian fiscal policy.
If you want to tell me that the Bank of Canada raised interest rates a bit too much a bit too soon to keep inflation at the 2% target, I would agree. But it's irrelevant to whether fiscal policy tightened too much too soon.
If you want to tell me that Divine Coincidence fails, and we should stop targeting 2% inflation, and target something like NGDP instead, I would totally agree. But it's irrelevant to whether fiscal policy tightened too much too soon.
The actual existing rules of the game are that the Bank of Canada targets its internal forecast of 2% inflation. It is held accountable for doing so, and is thereby held accountable for fully offsetting the effects on aggregate demand, output, employment, and hence inflation, of any changes to fiscal policy. The Bank of Canada only gets a break at the ZLB, where fiscal policy might be asked to share accountability. And the most effective way for fiscal policy to help, according to New Keynesian theory, is to increase government spending above normal while at the ZLB, and reduce government spending below normal immediately after. Prepone government investment, in other (Indian English) words.
You wanna change the rules of the game? Great! Let's have the Bank of Canada target NGDP instead. It won't work perfectly, but it should work better than the two failed extremes, where we crossed our fingers hoping that Divine Coincidence was true. Plus, it should help keep us off the ZLB, so fiscal policy can stick to its very important micro knitting, and not get messed up by helping the Bank of Canada do its job. [Update: so the government builds bridges when drivers need help driving places, and not when the central bank needs help controlling aggregate demand.]
"Keynesian" fiscal policy in Canada today is not what I learned in Kansas school in England in 1972. Times change.
Worthwhile Canadian Initiative 
This is a good one, but very brief, so come off sounding a bit glib. Obviously there’s a limit to what you can do in a very small space. There’s links provided though, for backing details.
“FP037 Why Communism Failed in under 5 minutes”
“This is “virtual machine capitalism” – socialism with capitalism run on top. Capitalists must then compete for labour from the JG pool – investing and training to receive any profits. It’s the latter that is the valuable process in capitalism – just as the heat out of a nuclear reactor is the valuable bit. To get that you simply have to contain the nasty stuff using effective engineering.
Because socialism has never done anything nasty… other than murder maybe 100 million people give or take a few train loads, let’s just hit that mental reset button, then go back to plan A for the first time. The one great lesson of history is that no one learns from history.”
OK. Can you specifically point out where millions of people will die when the Job Guarantee is introduced? I don’t want links to videos. Because if you don’t have a mechanism for the supposed disaster then what you are doing is spreading lies and deciet via McCarthy-style tactics accusing anyone to the left of you of being a Red.
Alternatively, you could get behind MMT’s very reasonable proposals, that contribute to aggregate demand and profits and make the labour market an actual market. ‘No deal’ is on offer. Why is competition and increasing freedom a bad thing? Is there any good reason why employers should pay below the living wage?
It’s amusing that you think if the employer fails to pay the rent, or the energy bill he must suffer consequences and possibly go out of business, but paying workers below a living wage is fine. Are you fine with in-work welfare benefits “topping up” wages?
Until then you are going to constantly get questioned, because what you have doesn’t deal with the problem of ‘effective demand’ whereas MMT does.
Keynes demonstrated aggregate demand is not enough 80 years ago.
And that means your suggestions will, in the United States, leave up to eight MILLION people, and probably more, out in the cold. Literally unless they can find space alongside many others in the drain pipes under Vegas.
This is a really great 6 part series, I’m getting sucked into this and using all my network quota:
“Communism – The Promise and the Reality”
Bob, you are trying to say that every proposal should be presumed good unless the exact details of what’s going to go wrong can be enumerated in advance. That sounds ridiculous to me.
Your background presumption is that capitalism is “nasty” and that socialism is somehow “nice” in comparison. I’m unwilling to allow the proponents of socialism to conveniently throw the murders of history down the forgettery. Socialism (in a whole range of forms) has been tried by various people at various times and it fails with great consistency. Where it does not collapse completely, it stagnates into grinding poverty like North Korea which must be one of the most high inequality nations on Earth. You have the Dear Leader so fat he can barely walk, while the people marching along behind you are like stick men. If there’s anything that deserves the tag “nasty” then without a doubt socialism/communism/Marxism would deserve that.
In terms of the specifics of your proposal, I’ve already explained my best guess about what’s going to happen. The rewards will end up going to a vested class of administrators who run those supposed “job creation” programs. They cannot logically create additional supply in the labour force while also creating higher wages because supply and demand don’t work that way. As a consequence, they create keep-busy jobs that produce vastly less than they cost, in effect slurping people out of the real labour market and putting those people under the control of the (now very powerful) program administrators. Eventually those programs get bigger, not smaller, and you gradually eat away at productive capacity, then just keep printing that money in the belief of Keynesian demand creation. To some extent that’s already happening in Australia, you can check the stats but something like half of all government spending goes into some type of welfare program and it keeps getting bigger. We have tried all sorts of schemes, including “Work for the Dole” which is not much different to your job guarantee, and none of them have produced great results.
Tel: I was just curious.
Tel and Bob: you two are wandering waaaay off-topic. Job Guarantee is just on-topic, since it’s (a hybrid of) fiscal (and monetary) policy. And it’s sorta Keynesian, if we stretch “keynesian” a bit.
Perhaps we should talk somewhere else 😉
http://pastebin.com/QMqhq3wa
“The rewards will end up going to a vested class of administrators who run those supposed “job creation” programs.”
As opposed to the vested class of capitalists who run the current supposed “job creation” programs.
All of which currently oversupplies luxury fripperies to the wealthy while failing to supply sufficient needs to the less well off. Hence homelessness, poverty, unemployment, lack of business investment and poor productivity. All while constantly creating financial bubbles that blow up the world for decades, and generating pointless ‘make-work’ jobs in the pension, PR, advertising and marketing industries.
It’s all the same really.
It’s very simple. Creating jobs and matching people to them runs out of matching capacity very quickly – particularly as productivity improves with robotic technology. Increasingly the private sector needs brain surgeons and most people are simply not capable of being brain surgeons.
Eventually you have to take the people as they are and create jobs for them. Because they need something to do with their time.
You have to have a mixed system. The nuclear engine of capitalism has to be contained in an appropriate containment vessel to stop it creating damage to the environment.
Nowhere has tried the Job Guarantee, because no system has ever tried to create specific jobs for the people that need them. All other systems have been designed as punishments rather than social care to deal with the reality of capitalism that it is systematically incapable of employment everyone.
“I used to be a New Keynesian, until the recent recession”
What are you now?
sam: I’m a bit more monetarist.