Two weekend posts? Both excellent? Man, the value proposition of a Slow Boring subscription is insane. Seriously I think it’s the best of any media I purchase.
Hear, hear! I love how Sliw Boring provides thoughtful analysis with acknowledgement of real trade offs, rather than cheap partisan point scoring. Thank you, Matt Y, Milan, and Maya!
It’s nice to see a piece calling out where you went wrong in a previously published article and where you were on target. It often feels like so much of the discourse is people saying “that’s not what I meant!”. Meaning what you say and then being willing to correct it on the record is the mark of an honest person. Thanks Milan!
"we will have effectively cured recessions." Said King Canute. This is hubris.
No mention of the enormous debt the stimulus policies added. Little of the sums wasted (my late mother received her stimulus payment after she died. My golf club thanks you taxpayers for financing our renovation with unnecessary PPP loans.)
I'm sure that if we had devoted a large team of bureaucrats to the problem and given them two years to write the rules and establish procedures and institute effective oversight procedures we could have avoided examples of waste like this in a program that hit the ground running right about, oh, now.
Debt is no problem because you can just pay it with more debt. If that ever stops working, you can just print the money you owe. People with Ph.D's say this will be fine.
"What this all adds up to is a world of persistently weak demand leading to higher unemployment and weak inflation, as a symptom of an economy with too much slack and not enough growth."
Perhaps that is a future that is Japanese, but I'm not sure. Japan is actually doing pretty well! Per capita GDP growth is fine; unemployment is not a problem. Paul Krugman gives us the bottom line: "In some ways, Japan, rather than being a cautionary tale, is a kind of role model — an example of how to manage difficult demography while remaining prosperous and socially stable." https://www.nytimes.com/2023/07/25/opinion/japan-china-economy.html
But overall, I agree with this piece. It was much better to overshoot and undershoot. Milan puts together an excellent argument with which I have no problems. I do kinda wonder what grade it would get if he submitted it to Harvard professor Jason Furman, though.
Another though. Milan contends that voters are likely to prioritise under stimulus to over stimulus because the harms of inflation are distributed broadly, while those of unemployment are narrowly felt. This seems explicitly contrary to public choice theory, which suggests large diffuse harms are frequently outweighed by smaller more intense harms in electoral politics.
Great piece overall, but this part seems...optimistic:
(The return of actual fiscal constraints in budgeting has the added benefit of restoring sanity to politics by realigning disputes along a traditional left-right axis on economic issues.)
I wonder if there are confounding variables that might also explain the difference in European vs American GDP, since we've been outperforming them since the end of the Cold War. I also wonder if there was anything unique about Greece in the post-GFC era that might not make them a representative country for the European experience in that time period.
Great Post, Milan - Curious if you’ll do one of Matt’s “alt. history” posts about what the optimal Covid stimulus would have looked like and the possible outcome (i.e., full employment, lower inflation, etc.)
It feels a bit like we’re ignoring the other cost of stimulus. It’s not just an unemployment vs inflation tradeoff. Stimulus is exceedingly expensive, that money will need to be payed back, and it will require increasing debts to eh services at ever higher interest rates crimping the capacity of the government to do other things.
A wealth tax would generate, at an extremely optimistic estimate, $300b/year. The budget deficit is $1.4t this year. Medicare for all, for example, would be something like $3-4t/year. I don't think you're getting much for a wealth tax, which is only one of the reasons it's crazy to even consider.
I really don't understand the hatred this blog has for using the Child Tax Credit as a one time pandemic measure. People's kids were at home and not at school! They needed child care! Plus it was a stimulus!
That credit helped a lot of people during an emergency and saying "it wasn't worth helping those people because our plan to trick the American people into making it permanent failed" just strikes me as flat wrong.
I think it was fine to give families this one-time cash benefit during that trying time. The problem was that it deluded progressive Democrats into thinking that by slipping this camel's nose under the tent they had a leg up in making it permanent (more mixed metaphors available on request). Thus we got the agony of the protracted BBB negotiations.
I’m glad to see you called out the risks of bailouts (moral hazard, and loss of creative destruction most importantly).
I think the very most important thing we got right with this big Covid stimulus is to focus on individuals and not corporations.
The key to a dynamic economy is to have intense competition between businesses. But in a world of intense competition, tons of businesses, have to die all the time. That is painful for individuals but as long as they can ride out the turbulence they’ll end up better off in the long run.
This is the dynamic that we’ve had for the last 20 years in Silicon Valley: people get laid off all the time, companies come and go every day, no incumbent is ever truly safe. But because this is a very high income industry with very low unemployment this all still works out well for the workers.
If only we could get there for all Americans! To do that we need a mix of safety net, to drive down the cost of living, and when external crises like COVID hit, stimulus targeted at individuals to help them invent the next economy.
Agreed. The goal for smoothing the business cycle should not be to do away with the business cycle in the manner that China is attempting to, but rather to insulate ordinary workers from its consequences as much as is possible while still allowing credit tightening, bankruptcies, and new business formation to “burn out the underbrush” as it were.
Your entire analysis of fiscal stimulus is unfortunately off the mark ... because you misunderstand monetary policy. You confuse monetary policy with interest rates. And you wrongly assume that interest rates at the "zero lower bound" means that monetary policy is impotent. That is not correct.
These statements are just wrong: "the Fed had already cut rates to zero and was basically out of juice" and "low rates make it very difficult for central bankers to provide stimulus via monetary policy".
In fact, central bank monetary policy works by changing the money supply -- which doesn't have a "zero lower bound". Interest rates are an EFFECT of monetary policy, not a significant part of the causal chain of controlling the economy. Monetary policy is always effective. More monetary stimulus is always possible. (No central bank that wanted to devalue its currency has ever failed.) The lost decade after 2008 was the fault of bad monetary policy from the US Federal Reserve, not the fault of too little fiscal stimulus. (E.g.: https://www.cato-unbound.org/2009/09/14/scott-sumner/real-problem-was-nominal/ ) Total aggregate demand is controlled by monetary policy, not by fiscal policy.
Once you correct this false "impotent" claim about monetary policy ... unfortunately your entire analysis of fiscal stimulus then falls apart. It all critically depended on monetary stimulus being powerless, and that one crucial assumption was completely false.
What does "less effective" mean? Can you define that term? We're talking about numbers here. There is no supply limit on integers. Nor is there a cost to monetary stimulus. The real-world "cost" of creating $10 is the same as the "cost" of creating $100 or $1000. So can you possibly offer an economic definition of your claimed "less effective"? By what metric, exactly?
Similarly ... are you aware that "QE" and "rate cuts" are actually the same underlying mechanism? The concrete action taken by the Fed is Open Market Operations, i.e. purchases of assets (mostly Treasury bonds), on the open market, at market prices, in exchange for newly created money. That is the same for both "QE" and "rate cuts". The only difference is how the Fed decides on the volume of purchases, and when to stop purchases.
(I hope you're aware that "rate cuts" do not refer to the Fed's discount rate, which it controls. Instead, traditional Fed "rate cuts" refer to the Federal Funds Rate, which is a free market interest rate. The Fed doesn't "set" the FFR; what it does is set a "target" for the FFR. And it achieves this target via the usual OMOs, changing the economy until the free market FFR floats into the Fed's target range.)
So: "QE" and "rate cuts" are actually the same mechanism. And "less effective" is not a description that applies to monetary policy. MV=PQ. You're picking an M. Your choice of the quantity for M is either "correct" or "wrong" (given your goals). It is not somehow "more" or "less" "effective".
Monetary supply is very important to an economy, but it seems foolish to accept it controls everything. E.g during Covid, the federal government stimulus was much more impactful than anything the fed could have done.
Similarly, post 2008, I think there is evidence that the fed could have done more, but also agree with Milan that the lack of additional stimulus was a mistake.
I agree that monetary policy doesn't control "everything" in an economy. Economics involves micro and macro; and macro itself involves the supply side and the demand side. Monetary policy only controls the demand side of the macro economy.
This claim is false: "the federal government stimulus was much more impactful than anything the fed could have done", at least as far as aggregate demand goes. (Again: there is more to the economy than just aggregate demand!)
A simple model for you could be: the Equation of Exchange is MV=PQ (= NGDP = aggregate demand). Inflation is just a change in the price level, and P=MV/Q. Now, money velocity V and real output Q are not fixed; however, the money supply M is completely arbitrary (just a number!), and under the monopoly control of the central bank. Which means that, no matter what happens to V or Q, there is always some money supply M that will result in any price level P (and thus any inflation) that the central bank may wish to target. If you're not seeing the inflation (or aggregate demand) that you want, the cause is ALWAYS that the central bank necessarily chose the wrong (arbitrary!) value for M (at least, given current economic conditions).
Fiscal policy doesn't matter (for managing aggregate demand). Monetary policy controls demand. "Monetary offset" has the power to "undo" whatever influence fiscal policy attempts.
I would also say that the government has more varied ways to distribute increased money supply. The fed is limited to distributing money mostly through bond transactions which can be very inefficient.
What does "efficient" mean, in this context? The money supply is like the sea level in the ocean: it doesn't matter where you "put it in"; the money flows "everywhere" very quickly. To a first approximation, only the quantity of money matters.
This is a great example. Sometimes there are events in the real economy like earthquakes in the ocean that create a tsunami. The aggregate amount of water in the ocean hasn't changed, but it's change in location can have devastating effects. Trying to counter those effects by controlling the overall water level is unlikely to succeed and could possibly create more damage in the attempt.
You apparently don't realize that I agree with you. When you have some industry-specific crisis (like a freeze in Florida that damages the orange crop), then monetary policy (and aggregate demand in general) is not the appropriate tool for that economic problem. I already said that aggregate demand isn't "everything"; it's only 1/4 of all economic theory. (Half is macro and half is micro; half is supply-side and half is demand-side. Monetary policy and aggregate demand are only about the 1/4 that is demand-side macroeconomics.)
Monetary policy is about the value of money, which uniformly affects the entire economy. If you have some narrow industry-specific problem, you would need to address it with a much more narrowly-focused economic tool. Monetary policy (and aggregate demand management in general) would be the wrong tool, in that case.
Your taking something important and making it everything with regard to aggregate demand. Question - can Canada's central bank create as much total aggregate demand as the US central bank? Or does the fact that the US is 10x the size of Canada matter how much total aggregate demand is possible?
You are confusing the real economy with the nominal economy.
The US may have 10x the geographic size, or 10x the population, or 10x the production of steel or cars. We're not talking about that. "Aggregate demand" is about the nominal economy, which is the amount of numbers (in wallets, in net worth, and on price tags). Inflation is a change in the price level, a change in the value of money, and has nothing to do with whether the economy is generating more or fewer apples than the year before.
The US economy is roughly 2.5x the size of Japan's economy. But the Japanese local currency units (Yen) are about 150x less than the purchasing power of a US local currency unit (dollar). Japan's aggregate demand (nominal GDP) is about 550 trillion local currency units (Yen). The US NGDP is "only" 23 trillion local currency units (dollars). Despite the fact that the "real" US economy is about 2.5x larger than Japan's, the "nominal" US economy is about 24x smaller than Japan's.
No, it does not at all matter that the US is 10x the (real) size of Canada, when asking whether Canada's central bank can create as much total (nominal) aggregate demand as it wants.
Yes, but the immediate response is that the nominal economy is irrelevant outside of its impact on the real economy. Its the relation between the two that matters!
And the Fed's impact on the real economy via nominal aggregate demand is not as smooth as the equation you layout above.
The Equation of Exchange, MV=PQ, is just an accounting identity, and tells you nothing at all about any causal relationship. I agree with you that the impact on the real economy matters, and that the nominal economy only matters because of its relationship to the real economy.
We haven't talked at all about the relationship between the real economy and the nominal economy. (The answer is: money is mostly "neutral" -- and maybe even "superneutral". So most of the real economy is immune to changes in the nominal economy. The main interaction between the two is via sticky prices: primarily wages, but also long-term debts. Nominal crashes cause real recessions because some critical prices don't adjust quickly enough, which changes the real economic burden of wages and debts.)
But none of this matters. Because Milan Singh's original post was about using fiscal policy to control aggregate demand. And my objection was that monetary policy dominates fiscal policy, for controlling aggregate demand. You are right that it is important why aggregate demand matters at all for the real economy; but that would be a criticism of BOTH my comments and also Singh's original post. Your concern about the real economy, while valid, is irrelevant for the important error that Singh made in the original post. Both Singh's post and my comments assume that aggregate demand matters for the real economy; the details of why and how it matters are beyond the scope of this discussion.
Two weekend posts? Both excellent? Man, the value proposition of a Slow Boring subscription is insane. Seriously I think it’s the best of any media I purchase.
Hear, hear! I love how Sliw Boring provides thoughtful analysis with acknowledgement of real trade offs, rather than cheap partisan point scoring. Thank you, Matt Y, Milan, and Maya!
It’s nice to see a piece calling out where you went wrong in a previously published article and where you were on target. It often feels like so much of the discourse is people saying “that’s not what I meant!”. Meaning what you say and then being willing to correct it on the record is the mark of an honest person. Thanks Milan!
It’s very Matt-esque.
Picturing Matt in a Sith robe going "good, good my apprentice.."
"we will have effectively cured recessions." Said King Canute. This is hubris.
No mention of the enormous debt the stimulus policies added. Little of the sums wasted (my late mother received her stimulus payment after she died. My golf club thanks you taxpayers for financing our renovation with unnecessary PPP loans.)
The point of the last section is that demographic factors are likely to push rates back down in the long term.
Like, when we're all dead? That long term?
Next 50 years
So assuming AGI is far off?
I'm sure that if we had devoted a large team of bureaucrats to the problem and given them two years to write the rules and establish procedures and institute effective oversight procedures we could have avoided examples of waste like this in a program that hit the ground running right about, oh, now.
Exactly. So we shouldn't shovel trillions out the door without any rules which is essentially what happened.
I think that’s slightly unfair.
Milan didn’t preclude future economic crises. He was just saying that we would “cure” their consequences.
If only it were so.
Debt is no problem because you can just pay it with more debt. If that ever stops working, you can just print the money you owe. People with Ph.D's say this will be fine.
"What this all adds up to is a world of persistently weak demand leading to higher unemployment and weak inflation, as a symptom of an economy with too much slack and not enough growth."
Perhaps that is a future that is Japanese, but I'm not sure. Japan is actually doing pretty well! Per capita GDP growth is fine; unemployment is not a problem. Paul Krugman gives us the bottom line: "In some ways, Japan, rather than being a cautionary tale, is a kind of role model — an example of how to manage difficult demography while remaining prosperous and socially stable." https://www.nytimes.com/2023/07/25/opinion/japan-china-economy.html
But overall, I agree with this piece. It was much better to overshoot and undershoot. Milan puts together an excellent argument with which I have no problems. I do kinda wonder what grade it would get if he submitted it to Harvard professor Jason Furman, though.
Cormac O’Dea >>>
Yale, Harvard. So many cookie cutter schools, I get them confused all the time.
Another though. Milan contends that voters are likely to prioritise under stimulus to over stimulus because the harms of inflation are distributed broadly, while those of unemployment are narrowly felt. This seems explicitly contrary to public choice theory, which suggests large diffuse harms are frequently outweighed by smaller more intense harms in electoral politics.
Great article Milan!
Great piece overall, but this part seems...optimistic:
(The return of actual fiscal constraints in budgeting has the added benefit of restoring sanity to politics by realigning disputes along a traditional left-right axis on economic issues.)
A man can dream
I dreamed a dream
https://youtu.be/uimsKQ0mlS4
I wonder if there are confounding variables that might also explain the difference in European vs American GDP, since we've been outperforming them since the end of the Cold War. I also wonder if there was anything unique about Greece in the post-GFC era that might not make them a representative country for the European experience in that time period.
Great Post, Milan - Curious if you’ll do one of Matt’s “alt. history” posts about what the optimal Covid stimulus would have looked like and the possible outcome (i.e., full employment, lower inflation, etc.)
Probably not, no
It feels a bit like we’re ignoring the other cost of stimulus. It’s not just an unemployment vs inflation tradeoff. Stimulus is exceedingly expensive, that money will need to be payed back, and it will require increasing debts to eh services at ever higher interest rates crimping the capacity of the government to do other things.
Similarly, I think Matt underplays the benefits of large wealth taxes: it generates lots of revenue that the government can use to do things!
A wealth tax would generate, at an extremely optimistic estimate, $300b/year. The budget deficit is $1.4t this year. Medicare for all, for example, would be something like $3-4t/year. I don't think you're getting much for a wealth tax, which is only one of the reasons it's crazy to even consider.
Great post! I learned a lot. Your research and grasp of economics is impressive
Thanks Michelle!
I really don't understand the hatred this blog has for using the Child Tax Credit as a one time pandemic measure. People's kids were at home and not at school! They needed child care! Plus it was a stimulus!
That credit helped a lot of people during an emergency and saying "it wasn't worth helping those people because our plan to trick the American people into making it permanent failed" just strikes me as flat wrong.
I think it was fine to give families this one-time cash benefit during that trying time. The problem was that it deluded progressive Democrats into thinking that by slipping this camel's nose under the tent they had a leg up in making it permanent (more mixed metaphors available on request). Thus we got the agony of the protracted BBB negotiations.
Weekend posts are great, and Milan is really flexing here with a banger here.
I’m glad to see you called out the risks of bailouts (moral hazard, and loss of creative destruction most importantly).
I think the very most important thing we got right with this big Covid stimulus is to focus on individuals and not corporations.
The key to a dynamic economy is to have intense competition between businesses. But in a world of intense competition, tons of businesses, have to die all the time. That is painful for individuals but as long as they can ride out the turbulence they’ll end up better off in the long run.
This is the dynamic that we’ve had for the last 20 years in Silicon Valley: people get laid off all the time, companies come and go every day, no incumbent is ever truly safe. But because this is a very high income industry with very low unemployment this all still works out well for the workers.
If only we could get there for all Americans! To do that we need a mix of safety net, to drive down the cost of living, and when external crises like COVID hit, stimulus targeted at individuals to help them invent the next economy.
Agreed. The goal for smoothing the business cycle should not be to do away with the business cycle in the manner that China is attempting to, but rather to insulate ordinary workers from its consequences as much as is possible while still allowing credit tightening, bankruptcies, and new business formation to “burn out the underbrush” as it were.
It was neither American, a rescue, nor a plan.
Discuss.
It was American, a rescue, and a plan.
Your entire analysis of fiscal stimulus is unfortunately off the mark ... because you misunderstand monetary policy. You confuse monetary policy with interest rates. And you wrongly assume that interest rates at the "zero lower bound" means that monetary policy is impotent. That is not correct.
These statements are just wrong: "the Fed had already cut rates to zero and was basically out of juice" and "low rates make it very difficult for central bankers to provide stimulus via monetary policy".
In fact, central bank monetary policy works by changing the money supply -- which doesn't have a "zero lower bound". Interest rates are an EFFECT of monetary policy, not a significant part of the causal chain of controlling the economy. Monetary policy is always effective. More monetary stimulus is always possible. (No central bank that wanted to devalue its currency has ever failed.) The lost decade after 2008 was the fault of bad monetary policy from the US Federal Reserve, not the fault of too little fiscal stimulus. (E.g.: https://www.cato-unbound.org/2009/09/14/scott-sumner/real-problem-was-nominal/ ) Total aggregate demand is controlled by monetary policy, not by fiscal policy.
Once you correct this false "impotent" claim about monetary policy ... unfortunately your entire analysis of fiscal stimulus then falls apart. It all critically depended on monetary stimulus being powerless, and that one crucial assumption was completely false.
I’m aware of the money supply mechanism; I’m also aware that QE is less effective than rate cuts.
What does "less effective" mean? Can you define that term? We're talking about numbers here. There is no supply limit on integers. Nor is there a cost to monetary stimulus. The real-world "cost" of creating $10 is the same as the "cost" of creating $100 or $1000. So can you possibly offer an economic definition of your claimed "less effective"? By what metric, exactly?
Similarly ... are you aware that "QE" and "rate cuts" are actually the same underlying mechanism? The concrete action taken by the Fed is Open Market Operations, i.e. purchases of assets (mostly Treasury bonds), on the open market, at market prices, in exchange for newly created money. That is the same for both "QE" and "rate cuts". The only difference is how the Fed decides on the volume of purchases, and when to stop purchases.
(I hope you're aware that "rate cuts" do not refer to the Fed's discount rate, which it controls. Instead, traditional Fed "rate cuts" refer to the Federal Funds Rate, which is a free market interest rate. The Fed doesn't "set" the FFR; what it does is set a "target" for the FFR. And it achieves this target via the usual OMOs, changing the economy until the free market FFR floats into the Fed's target range.)
So: "QE" and "rate cuts" are actually the same mechanism. And "less effective" is not a description that applies to monetary policy. MV=PQ. You're picking an M. Your choice of the quantity for M is either "correct" or "wrong" (given your goals). It is not somehow "more" or "less" "effective".
Monetary supply is very important to an economy, but it seems foolish to accept it controls everything. E.g during Covid, the federal government stimulus was much more impactful than anything the fed could have done.
Similarly, post 2008, I think there is evidence that the fed could have done more, but also agree with Milan that the lack of additional stimulus was a mistake.
I wonder how many Fed fundamentalists are actually out there, that we now have two of them.
I agree that monetary policy doesn't control "everything" in an economy. Economics involves micro and macro; and macro itself involves the supply side and the demand side. Monetary policy only controls the demand side of the macro economy.
This claim is false: "the federal government stimulus was much more impactful than anything the fed could have done", at least as far as aggregate demand goes. (Again: there is more to the economy than just aggregate demand!)
A simple model for you could be: the Equation of Exchange is MV=PQ (= NGDP = aggregate demand). Inflation is just a change in the price level, and P=MV/Q. Now, money velocity V and real output Q are not fixed; however, the money supply M is completely arbitrary (just a number!), and under the monopoly control of the central bank. Which means that, no matter what happens to V or Q, there is always some money supply M that will result in any price level P (and thus any inflation) that the central bank may wish to target. If you're not seeing the inflation (or aggregate demand) that you want, the cause is ALWAYS that the central bank necessarily chose the wrong (arbitrary!) value for M (at least, given current economic conditions).
Fiscal policy doesn't matter (for managing aggregate demand). Monetary policy controls demand. "Monetary offset" has the power to "undo" whatever influence fiscal policy attempts.
I would also say that the government has more varied ways to distribute increased money supply. The fed is limited to distributing money mostly through bond transactions which can be very inefficient.
What does "efficient" mean, in this context? The money supply is like the sea level in the ocean: it doesn't matter where you "put it in"; the money flows "everywhere" very quickly. To a first approximation, only the quantity of money matters.
This is a great example. Sometimes there are events in the real economy like earthquakes in the ocean that create a tsunami. The aggregate amount of water in the ocean hasn't changed, but it's change in location can have devastating effects. Trying to counter those effects by controlling the overall water level is unlikely to succeed and could possibly create more damage in the attempt.
You apparently don't realize that I agree with you. When you have some industry-specific crisis (like a freeze in Florida that damages the orange crop), then monetary policy (and aggregate demand in general) is not the appropriate tool for that economic problem. I already said that aggregate demand isn't "everything"; it's only 1/4 of all economic theory. (Half is macro and half is micro; half is supply-side and half is demand-side. Monetary policy and aggregate demand are only about the 1/4 that is demand-side macroeconomics.)
Monetary policy is about the value of money, which uniformly affects the entire economy. If you have some narrow industry-specific problem, you would need to address it with a much more narrowly-focused economic tool. Monetary policy (and aggregate demand management in general) would be the wrong tool, in that case.
Your taking something important and making it everything with regard to aggregate demand. Question - can Canada's central bank create as much total aggregate demand as the US central bank? Or does the fact that the US is 10x the size of Canada matter how much total aggregate demand is possible?
You are confusing the real economy with the nominal economy.
The US may have 10x the geographic size, or 10x the population, or 10x the production of steel or cars. We're not talking about that. "Aggregate demand" is about the nominal economy, which is the amount of numbers (in wallets, in net worth, and on price tags). Inflation is a change in the price level, a change in the value of money, and has nothing to do with whether the economy is generating more or fewer apples than the year before.
The US economy is roughly 2.5x the size of Japan's economy. But the Japanese local currency units (Yen) are about 150x less than the purchasing power of a US local currency unit (dollar). Japan's aggregate demand (nominal GDP) is about 550 trillion local currency units (Yen). The US NGDP is "only" 23 trillion local currency units (dollars). Despite the fact that the "real" US economy is about 2.5x larger than Japan's, the "nominal" US economy is about 24x smaller than Japan's.
No, it does not at all matter that the US is 10x the (real) size of Canada, when asking whether Canada's central bank can create as much total (nominal) aggregate demand as it wants.
Yes, but the immediate response is that the nominal economy is irrelevant outside of its impact on the real economy. Its the relation between the two that matters!
And the Fed's impact on the real economy via nominal aggregate demand is not as smooth as the equation you layout above.
The Equation of Exchange, MV=PQ, is just an accounting identity, and tells you nothing at all about any causal relationship. I agree with you that the impact on the real economy matters, and that the nominal economy only matters because of its relationship to the real economy.
We haven't talked at all about the relationship between the real economy and the nominal economy. (The answer is: money is mostly "neutral" -- and maybe even "superneutral". So most of the real economy is immune to changes in the nominal economy. The main interaction between the two is via sticky prices: primarily wages, but also long-term debts. Nominal crashes cause real recessions because some critical prices don't adjust quickly enough, which changes the real economic burden of wages and debts.)
But none of this matters. Because Milan Singh's original post was about using fiscal policy to control aggregate demand. And my objection was that monetary policy dominates fiscal policy, for controlling aggregate demand. You are right that it is important why aggregate demand matters at all for the real economy; but that would be a criticism of BOTH my comments and also Singh's original post. Your concern about the real economy, while valid, is irrelevant for the important error that Singh made in the original post. Both Singh's post and my comments assume that aggregate demand matters for the real economy; the details of why and how it matters are beyond the scope of this discussion.