I have been down and out with a nasty flu in the last couple of days – as has the rest of Christensen household – so I am not really up for blogging. A bit of Googlenomics will tell you that I am not the only one with a flu in Denmark. See what Google Trends has to say about the issue here.

So you will have to excuse me – I am not really up for a lot of blogging. However, I anyway need to do a bit of PR for a couple of blog posts, which are critical (but friendly) of some of my posts.

First we start out with Bob Murphy. Bob wrote an excellent survey of why expansionary fiscal policy might not be expansionary at all and why fiscal austerity would not necessarily lead to a contraction in output. I wrote a post discussing this issue and while agreeing with Bob I claimed Bob ignored the importance. Now Bob has an excellent response to my post.

I my post I challenged Bob to find an example of “expansionary fiscal contraction” where NGDP growth was weak (monetary conditions were tight). Bob has this objection:

What do I mean? Well, suppose a new president (perhaps a fan of this blog) takes office in a small country and (a) cuts government spending by 30% in one year and income taxes by 15%, in absolute terms, and (b) abolishes the central bank and ties its currency to gold. A large budget deficit is transformed in one year into a modest surplus. Further suppose that my wacky Austrian views happen to be right–and Lars/Scott Sumner are utterly wrong. What happens?

Well, because I’m right (by stipulation), the real economy is just fine. There might be an initial period where the official unemployment rate in the country shoots through the roof, because workers have to move out of government (or government-subsidized) sectors, and into purely private sectors. But the big tax cuts and stability provided by the new gold standard, as well as the drop in government borrowing, lead to a fall in interest rates and a surge in private investment and job creation. Within 6 months, the unemployment rate is below the level at the start of the policy change. For the year, real GDP is up 8% when all is said and done, while consumer prices fall 2%.

Now I would look at this as a stunning refutation of Lars’ views, and a great counterexample. But he would look at the figures and say, “What do you mean Bob? Clearly maintaining aggregate expenditures was crucial for that giant reduction in government spending to work out. Nominal GDP rose 6% during the year, and interest rates fell. It was only the relatively loose monetary policy that offset the fiscal contraction.”

Does everybody see what I’m saying? Lars has defined “accommodative monetary policy” in such a way that I would have to find a government that simultaneously slashed spending while deliberately engineered massive price deflation. If the market monetarists are wrong, then it means a government could enact very tight restrictions on monetary inflation–perhaps going back on gold–and yet their own metric would classify that as “not tight” so long as the economy didn’t collapse. That is not a good way to think about these issues, especially since the very issue under dispute is whether the market monetarists are right