Ten Economics Pieces Worth Reading: January 30, 2009
Nobody Expects the...

Can Someone Please Tell Me How This Is Supposed to Be Good Policy?

There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.

The tools to fight a further rise in unemployment are threefold:

  • Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.

  • Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.

  • Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.

The populist anger and fallout from the last set of banking policy interventions has taken the first of these off the table.

The current complexion of the Federal Open Market Committee has taken the second of these off the table.

And now Barack Obama is taking the third of these off the table.

Will someone please tell me how this is supposed to be good policy?

Daniel Dombey of the FT:

Obama sets stage for fiscal retrenchment: President Barack Obama set the stage on Saturday for an administration budget proposal intended to begin fiscal retrenchment after several years of high spending against recession. In his weekly radio and video address, Mr Obama highlighted his promise to pull back the country’s $1,400bn fiscal deficit, the goal set to be at the heart of Monday’s budget proposals. “As we work to create jobs, it is critical that we rein in the budget deficits we’ve been accumulating for far too long – deficits that won’t just burden our children and grandchildren, but could damage our markets, drive up our interest rates, and jeopardise our recovery right now,” he said.

Mr Obama praised the US Senate for restoring a pay-as-you-go law intended to prevent unfunded programmes from being approved and drew attention to his own plans for a three year freeze on discretionary spending, except for national security. The savings from such a freeze will be relatively modest – reducing the  $12,400bn in accumulated government deficits over the next decade by only $250bn, according to the Committee for a Responsible Federal Budget. But administration officials hope the freeze will signal commitment to fiscal discipline and help build consensus for more fundamental measures that deal with burgeoning entitlements spending.

In his address, Mr Obama highlighted his plan for reaching such a consensus – a bipartisan Fiscal Commission intended to “sit down and hammer out concrete deficit-reduction proposals by a certain deadline”.  He added: “We’ve heard plenty of talk and a lot of yelling on TV about deficits, and it’s now time to come together and make the painful choices we need to eliminate those deficits.”...