What do economists think about current fiscal/monetary policy?
The title pretty much says it all. It seems like the news networks get strategists and authors and columnists to come on and do interviews that agree with the political leanings of the station (ie republican for foxnews, democratic for most others), but I’ve yet to see people interviewing some actual economists on the measures to counter the recession (for example, the stimulus bill). Is anyone an economists who can give an opinion or has anyone seen an interview that can enlighten me on the economists’ views?
It appears that the dominant view among economists can be summarized as follows:
The U.S. went into the current recession as a consumer-driven economy: consumption in the US accounted for approximately 70% of GDP. But now consumers are deep in debt. Household debt went up to 140 percent of personal income, up from less than 80 percent in 1990. Households are struggling to pay it down, and this process could take years. Meanwhile, frightened consumers will be saving more: In the current recession, for example, the net financial balance of the private households has risen from -3.6% of GDP in 2006 to +5.6% in the first quarter of 2009. Such large increase in savings translates in a decline in consumption and means falling sales, production and further declines in GDP. This trend will put the US finances in better shape and reduce its dependence on foreign investment, but it will also restrict economic growth in 2010 and beyond. The bottom line: Consumer spending may pick up a bit as the recession fades, but it will not lead the way out of the recession.
Possible policy measures: (1) tax cuts, (2) monetary expansion, (3) government spending.
(1) With the increased savings rates, tax cuts are not an effective policy because a large portion of the additional disposable income generated by the tax cuts will be saved and not spent.
(2) With interest rates roughly zero and a recession that is the fruit of past irrational exuberance, conventional monetary policy has run out of room. The economy is likely in or close to a liquidity trap where monetary policy is ineffective since the interest rates cannot fall any further.
(3) Bottom line, this means that there is not much alternative than old fashioned fiscal policy in form of huge stimulus package(s) which will pull the economy out of the recession.
Proponents of this line are well known economists like
Romer: http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=13856176#
Krugman: http://krugman.blogs.nytimes.com/2009/09/29/the-true-fiscal-cost-of-stimulus/
Roubini: http://www.rgemonitor.com/
Stiglitz: http://www2.gsb.columbia.edu/faculty/jstiglitz/
Opponents argue that the so called ‘multiplier’ that translates the higher government spending into higher economic growth rates are overestimated and therefore the fiscal policies are not effective.
Economists supporting this view are the ‘fresh water economists’ among the most prominent is Robert Lucas: http://home.uchicago.edu/~sogrodow/
http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=14165405
An excellent article which covers the current debate among the different economic schools can be found in the Economist: http://www.economist.com/displaystory.cfm?story_id=14030288
The economics world is divided down those same ideological lines. There are ‘neoclassical’ economists who believe in the power of the free market (sometimes without condition), and the ‘Keynesians’ who advocate for some level of government involvement in the economy. That’s a very rough division, though.
One of the more popular thinkers among the latter group is Paul Krugman, the 2008 winner of the economic Nobel, who also writes a column for the New York Times. He has been arguing in recent columns that more stimulus is needed, because although the stock market is back on track, unemployment is almost at 10%, and rising (263 000 jobs lost in September)!
Opponents point out that increasing the budget deficit even more is dangerous, and some say that the stimulus is directed at the wrong places. Some, especially those who believe in the ‘magic’ of the free market, think that all of this is pointless anyway because it doesn’t work, and the economy is recovering by itself as it always has.
Who’s right? Who knows?! Unfortunately, the (macro)economy moves very slowly, and so we don’t really have enough data to make accurate inferences about how things work (we only have reliable numbers stretching back a few decades). So whenever someone claims to know some macroeconomic "truth" (other than something trivial, like increasing the money supply drives interest rates down), you should be fairly skeptical.
Heh, I’ve been waiting for a chance to write that stuff down for my own sake. Material from different courses can mix freely in your head and confuse you sometimes…
References :
http://krugman.blogs.nytimes.com/
It appears that the dominant view among economists can be summarized as follows:
The U.S. went into the current recession as a consumer-driven economy: consumption in the US accounted for approximately 70% of GDP. But now consumers are deep in debt. Household debt went up to 140 percent of personal income, up from less than 80 percent in 1990. Households are struggling to pay it down, and this process could take years. Meanwhile, frightened consumers will be saving more: In the current recession, for example, the net financial balance of the private households has risen from -3.6% of GDP in 2006 to +5.6% in the first quarter of 2009. Such large increase in savings translates in a decline in consumption and means falling sales, production and further declines in GDP. This trend will put the US finances in better shape and reduce its dependence on foreign investment, but it will also restrict economic growth in 2010 and beyond. The bottom line: Consumer spending may pick up a bit as the recession fades, but it will not lead the way out of the recession.
Possible policy measures: (1) tax cuts, (2) monetary expansion, (3) government spending.
(1) With the increased savings rates, tax cuts are not an effective policy because a large portion of the additional disposable income generated by the tax cuts will be saved and not spent.
(2) With interest rates roughly zero and a recession that is the fruit of past irrational exuberance, conventional monetary policy has run out of room. The economy is likely in or close to a liquidity trap where monetary policy is ineffective since the interest rates cannot fall any further.
(3) Bottom line, this means that there is not much alternative than old fashioned fiscal policy in form of huge stimulus package(s) which will pull the economy out of the recession.
Proponents of this line are well known economists like
Romer: http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=13856176#
Krugman: http://krugman.blogs.nytimes.com/2009/09/29/the-true-fiscal-cost-of-stimulus/
Roubini: http://www.rgemonitor.com/
Stiglitz: http://www2.gsb.columbia.edu/faculty/jstiglitz/
Opponents argue that the so called ‘multiplier’ that translates the higher government spending into higher economic growth rates are overestimated and therefore the fiscal policies are not effective.
Economists supporting this view are the ‘fresh water economists’ among the most prominent is Robert Lucas: http://home.uchicago.edu/~sogrodow/
http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=14165405
An excellent article which covers the current debate among the different economic schools can be found in the Economist: http://www.economist.com/displaystory.cfm?story_id=14030288
References :