Time for More Short-Run Fiscal Expansion?

A year into the financial crisis. The fact that it has dragged on for a year is evidence of both (a) its seriousness--the consequence of a mammoth failure of risk management--and (b) the success of the Federal Reserve and company in keeping it from crashing the real economy.

Paul Krugman:

A Slow-Mo Meltdown: A year ago, as the outlines of the current financial crisis were just becoming clear, I suggested that this crisis, unlike a superficially similar crisis in 1998, wouldn’t end quickly. It hasn’t....

Home prices are down about 16 percent over the past year, and show no sign of stabilizing.... [T]he job market has deteriorated even more than you’d guess from the jump in the headline unemployment rate. The broadest measure of unemployment... has risen from 8.3 percent to 10.3 percent over the past year, roughly matching its high point five years ago....

Ben Bernanke and his colleagues at the Federal Reserve have cut the interest rates they control repeatedly since last September. But they haven’t managed to reduce borrowing costs for the private sector.... The problem is fear: private-sector finance has dried up because investors, burned by their losses on securities that were supposed to be safe, are now reluctant to buy anything that isn’t guaranteed by the U.S. government... those tax rebates Congress and the White House agreed to mail out have already done whatever good they’re going to do....

What more can policy do? The Fed has pretty much used up its ammunition... nothing much can or should be done to support home prices, which are still much too high in inflation-adjusted terms. Nor can Washington prevent a continuing credit crunch....

There is, however, a case for another, more serious fiscal stimulus package, as a way to sustain employment while the markets work off the aftereffects of the housing bubble. The “emergency economic plan” Barack Obama announced last week is a move in the right direction, although I wish it had been bigger and bolder.

Still, Mr. Obama is offering more than John McCain, whose economic policy mainly amounts to “stay the course”...

Comments

[save_the_rustbelt]

(Most) economists were the last to know.

Next year's AEA meeting should be in Flint Michigan.

An introduction to reality.

[adam]

I think you and Krugman are incorrect when you point to U6 as providing a different and better characterization of the labor market than the standard unemployment rate (U3). If you simply run the regression U6=U3+e over history and use that to forecast U6 over 2007 and 2008, you would see exactly the same pattern of weakness. In other words, U3 and U6 are providing exactly the same information.

[howard]

save_the_rustbelt, i've actually been in flint several times recently. what makes it "realer" than anywhere else in these united states? ever been in one of the old new england mill towns? economists understand perfectly well that aggregate statistics mask individual variation. having seen flint up close and personal, i don't actually know a single thing more about "reality" as you're defining it than i already knew.

perhaps you could explain what it is that economists are supposed to learn that's "real" from a visit to Flint....

[save_the_rustbelt]

Flint is certainly not exclusive.

But the 17% unemployment rate is sure a head turner.

Could be a lot of other cities as well - other than some vacation spot.

To be fair, AEA did last year in New Orleans, a very good thing to do, so they get an extra cookie for that.

[christofay]

"the success of the Federal Reserve and company in keeping it from crashing the real economy"

The Greenspan 1% fiscal policy did effect the real economy. It induced all sorts of malinvestment in SUVs and home price gunning. The real world effect is gas guzzling monsters and wild overstock in housing supply. To some extent the made-by-government statistics GDP, CPI and unemployment mask the real world effects; lots of unemployed middle management for example.

As to Bernanke's plan to bail out the i-banks, well let the cycle run longer to see whether we will suffer losses.

Delong: the success of the Federal Reserve and company in keeping it from crashing the real economy.

Krugman: The Fed has pretty much used up its ammunition

Delong: the success of the Federal Reserve and company in keeping it from crashing the real economy.

Krugman: There is, however, a case for another, more serious fiscal stimulus package, as a way to sustain employment while the markets work off the aftereffects of the housing bubble. ... bigger and bolder.

bigger and bolder

charge it to the kids

bigger and bolder

something that will fill up the SUV

bigger and bolder

and keep the compensation for innovative finance sphere super senior

I keep tripping on the trip A