Don’t be fooled by economists telling you the risks of a Japan disease are not real. They are. And when economists are honest like Janet Yellen has been, they will tell you that it is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage. Moreover, Larry Summers is quite direct in telling us that he views the purpose of fiscal policy is to promote aggregate demand via “borrowing and lending, and spending”. How is that consistent with private sector deleveraging? Doesn’t this actively promote the preconditions for the Japan disease?
I don’t have a great deal to add to the two articles other than to comment on Mr. Harrison’s prescription:
Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously. Policy makers should aid the economy in reallocating scarce resources to areas that will sustain longer-term productivity growth while doing this. In America, that means fewer resources in finance and housing and perhaps more in technology and infrastructure.
Two observations here. First, helping the economy reach full employment and reallocating assets away from finance and housing construction in the near term are, unfortunately, in conflict. The economic dislocation will, in the short term, result in more unemployment rather than less. That’s why the administration and the Federal Reserve have been so active in propping up the failing sectors rather than supporting sectors in which there are some prospects for future growth. Wishing for the status quo ante is an inherent quality of political institutions, not an accidental one.
Second, IMO we should be very careful about just what technology and infrastructure we invest in and how we do it. I believe that we’re enormously over-invested in biotechnololgy, for example. That may pay off enormously. Or it may be an utter waste.
If you define infrastructure as roads and bridges, do we have enough or far too much? I think the latter (building bridges to nowhere, anyone?) and that rather than diluting our resources by trying not only to maintain everything but even to expand it we should concentrate on what’s most important and most productive. Does that argue for the federal government doing these things? I’m not so sure.
Here in the Chicagoland area we have plenty of roads. Our problems are that many of our roads don’t go the right way and we have peak load problems. The reason for the former is political and I don’t think the solution to the latter is more roads.