I want to draw your attention to a lengthy and thoughtful post by my long time blog-friend, Marc Schulman, proprietor of the blog American Future. Marc is a retired Wall Street guy, reasonable, knowledgeable, and IMO a good egg.
He begins by outlining the history of the fiscal and monetary policy responses to the economic downturn to date, no mean feat in a blog post. His proposal for moving forward is not unlike that of Scott Summers Sumner: he advocates loosening fiscal policy and tightening monetary policy. Read the whole thing. Lots of charts and graphs for those of you who are into such things.
I have a few reservations about Marc’s proposals the most important of which is that I see the strategy he outlines as ancillary to substantial structural reforms, not a substitute for them. As the chart I posted here yesterday suggests private sector GDP is moving sideways and is only loosely correlated with increases in public sector spending. Total GDP continues to rise solely due to the huge, unsustainable deficit.
Second, we have both a near term economic problem and a long term one. Absent two consecutive bubbles private sector per capita real GDP would have grown very little if at all over the period of the last 15 years. I don’t know how you account for the effects of a bubble when determining aggregate demand but I find it incredible that the bubbles would account for nothing at all of our growth over the period. Those bubbles have created enormous problems of bad resource allocation and much of the policy response has been to retard or prevent the necessary re-allocation.
Third, we are perilously near primary default. If we are going to try yet another round of fiscal stimulus, it should be quick, efficient, and large enough to make a difference. We can’t lather, rinse, and repeat forever. And by “forever†I mean more than another couple of years.
I am extremely skeptical that pouring money into the education, healthcare, government, and bubble sectors will turn the economy around. But it’s self-evident that borrowing to do so will expand the debt.
I think that the first bubble, the dotcom/IT bubble, probably contributed to the structural problems we have now, so I think that contributes to growth in the long run. The real estate/finance sector bubble was much, much more toxic (hope you saw Durden’s post on derivative risk). That said, too much of our growth from 1980 was debt financed. While I think Marc’s and Sumner’s ideas have some merit (not sure the Fed can really accomplish it), I still dont know how you get past the fact that neither consumers nor govt have much to spend.
Steve
Dave — Thanks for the publicity.
Really? We tightened money once before during a financial crisis and it took a very long time for things to “return to normal” over two decades and a World War occurred before things got notably better, IMO.
I’m skeptical that is Summers view, do you have a link, I’ve looked at many of his posts just a few minutes ago and didn’t see anything that looked like a prescription for what to do going forward.
Steve — I’m calling for a modest tightening of monetary policy within the context of a significant loosening of fiscal policy. That’s a big difference from the Depression, during which both were tightened.
This is the opposite of Sumner’s view. He proposes NDGP targeting (which right now would involve much looser monetary policy) and loathes fiscal stimulus. He has also said that tight monetary policy would work to counteract any fiscal stimulus.
See his FAQ – #9, 11, 12 for starters
http://www.themoneyillusion.com/?page_id=3447