The Fatal Distraction: Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture…. [W]hen McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?
So short-run deficits aren’t a problem; lack of demand is, and spending cuts are making things much worse. Maybe it’s time to change course?
Which brings me to President Obama’s planned speech on the economy.
I find it useful to think in terms of three questions: What should we be doing to create jobs? What will Republicans in Congress agree to? And given that political reality, what should the president propose?… [W]e should have a lot of job-creating spending on the part of the federal government, largely in the form of much-needed spending to repair and upgrade the nation’s infrastructure. Oh, and we need more aid to state and local governments, so that they can stop laying off schoolteachers. But what will Republicans agree to? That’s easy: nothing…. This reality makes the third question — what the president should propose — hard to answer, since nothing he proposes will actually happen anytime soon. So I’m personally prepared to cut Mr. Obama a lot of slack on the specifics of his proposal, as long as it’s big and bold. For what he mostly needs to do now is to change the conversation…
I would add another page to the book. What in most important is not just what Obama proposes on Thursday (because nothing will get done by congress), but rather what he does in the weeks and months afterwards to actually tune the economy so that it creates more jobs. I think Obama should:
Apply a full-court press to the Federal Reserve to get it to target nominal GDP to close the spending gap, for it is fear of risk that nobody will spend to buy what you make and confidence that your purchasing power is safe in cash that is holding back businesses from spending money to hire people.
Apply a full-court press to the Federal Reserve to get it to engage in more quantitative easing--into taking more risk onto its own balance sheet, for it is an unwillingness on the part of Wall Street to hold the risk currently out there that is making it very difficult for a wide range of risky spending projects to get financing.
Quantitative easing does not have to be done by the Fed: the Treasury can use residual TARP authority to take tail risk onto its own books as well, and should be doing so as much as possible.
Expansion does not require that the federal government spend: using Treasury (and Fed!) money to grease the financing of infrastructure and other investments by states would pay enormous dividends.
For the Treasury Secretary to announce that a weak dollar is in America's interest right now would not only boost exports, but it would immediately lead to a shift in monetary policy in Europe toward a much more expansionary profile--which would be good for the world.
None of these is first-best. All of these are likely to do some good. All should be tried.