Recommended: John Cassidy: How Markets Fail: The Logic of Economic Calamities
Jared Bernstein Advises the White House

Economist John Taylor vs. Economist John Taylor

John Taylor (and Robert Hall), Macroeconomics, 5th ed.:

pp. 190 ff.: We now know that an increase in government spending... increases the interest rate and increases income.... [T]he increase in government demand increases GDP through the multiplier.... [But] interest rates must [also] rise to offset the increase in money demand.... This increase in interest rates will reduce investment demand and net exports and thus offset some of the stimulus to GDP caused by government spending. The offsetting negative effect is crowding out.... An expansionary fiscal policy will have a relatively strong effect on aggregate demand if interest rates don't rise by much [when government spending increases]...

John Taylor (and 149 others) this week:

An increase in the national debt limit that is not accompanied by significant spending cuts and budget reforms to address our government’s spending addiction will harm private-sector job creation in America. It is critical that any debt limit legislation enacted by Congress include spending cuts and reforms that are greater than the accompanying increase in debt authority being granted to the president. We will not succeed in balancing the federal budget and overcoming the challenges of our debt until we succeed in committing ourselves to government policies that allow our economy to grow. An increase in the national debt limit that is not accompanied by significant spending cuts and budget reforms would harm private-sector job growth and represent a tremendous setback in the effort to deal with our national debt.

So Taylor has gone from arguing (a) that increases in government spending have an exceptionally strong positive effect on production, income, and employment when interest rates are--as they are now--not responsive to increases in the deficit; to arguing (b) that increases in government spending have a negative effect on employment.

How does one do this?

There is one potential loophole to make these two statements consistent. Note that the second statement (b) only claims that increasing government spending via raising the debt ceiling will "harm private-sector job creation"--it does not claim that it will harm overall job creation.

The two statements from Taylor could be consistent if Taylor thinks that raising the debt ceiling would reduce private-sector employment growth but raise government employment growth by more. But that would only hold if the overwhelming bulk of government spending increases went to pay public employees' salaries rather than to buy goods and services from the private sector--and that is simply not the case.

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