Tuesday, October 26, 2010

Today's article du jour: Our Fiscal Policy Paradox

By Alan S. Blinder, Wall Street Journal

The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens.

To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve.....

There are plenty of powerful weapons left in the fiscal-policy arsenal. But Congress is tied up in partisan knots that will probably get worse after the election. On the other hand, the Fed stands ready—indeed, seems eager—to act. But it has already deployed its most powerful weapons, leaving only weak ones. That's the paradox. ....

The government could hire people directly onto public payrolls, as Roosevelt did with the Civilian Conservation Corps and the Works Progress Administration. These days, many of the new hires would wind up on state and local, rather than federal, payrolls. But the federal government can still foot the bill.....

But many of us worry that this second round of quantitative easing will not be powerful enough to move our $15 trillion economy much....

In a more rational world, it wouldn't be this way. Fiscal policy, which packs the power, would be doing the heavy lifting—by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don't live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that's the Federal Reserve. The fiscal army is AWOL. (Read the whole article)

No comments:

Post a Comment