"If the new president had a target of full employment, and if Americans believed that he could reach it the confidence problem could be quickly solved

Robert J. Shiller has a post in the NY Times:

"IN the current crisis, discussions of economic policy have often centered on uninspiring, short-term goals. To restore confidence in our economic future, we need appropriate, firm targets that will clearly put us where we want to be."

I think that we can be excused for dwelling upon the immediate danger in these circumstances.

"For example, President-elect Barack Obama has framed his economic stimulus package in terms of the number of jobs he will create. The goal is to add 2.5 million jobs, he says, by hiring people to improve our highways, fix up our schools and do other infrastructure work around the country. All of that is fine, but it does not represent a commitment to full employment — providing a job for everyone who is willing to work. As a result, confidence remains abysmal.If the new president had a target of full employment, and if Americans believed that he could reach it, the confidence problem could be quickly solved."

I have spent years, ever since reading "The Share Economy", in trying to devise ways to get to full employment. Let me also remind readers that I favor, if I had my druthers, a Guaranteed Income with Health Care being provided within the bounds of that income. In doing this, I am following ideas first propounded by Milton Friedman, and most lately developed by Charles Murray. Within that guarantee, it would obviously be better to find ways for full employment.

"The Great Depression provides an analogy. Presidents Herbert Hoover and Franklin D. Roosevelt had at least a vague idea that economic stimulus would help the situation, but even Roosevelt lacked clear targets for such policies during the New Deal. The economic stimulus applied was inconsistent and inadequate. Confidence waned, and the depression was longer and deeper than it needed to be."

I don't agree with this. I believe that in many ways Roosevelt was more Conservative than Hoover, and found that, in the necessity of dealing with the Depression, he had to alter those beliefs as he went along. I would say that he was Pragmatic, and the fact that we survived is proof of his effectiveness. I've also tried reminding people of the context of the 30s, which is not our context, which was that many people believed that Capitalism was dead, and that Totalitarianism, namely Communism and Socialism, were the only choices. You simply cannot denude any decisions of that time, even Economic ones, of that context. His targets were necessitated by massive threats to our very survival.

"People still remember aspects of that depression history. The Works Progress Administration and the Civilian Conservation Corps tackled infrastructure projects, much as Mr. Obama proposes — but these New Deal programs were not enough to restore full employment. That history reduces the current credibility of Mr. Obama’s target of 2.5 million jobs."

That's because they were experimental, and were being tried out in order to assess their effectiveness.

"On the other hand, there have been some worthwhile targets in monetary policy in recent years. A number of central banks have adopted firm inflation targets, which has helped to contain inflation expectations. Those expectations have tended to coincide roughly with the targets."

I agree.

"At the moment, of course, inflation is no longer the fundamental risk. Our current problems are deflation and recession — possibly even depression — and so we must rethink our targets."

I agree.

"An immediate shift to a full employment target may not be possible, simply because there is no confidence right now that we can hit it. While people seem to believe that central banks can control inflation, there is little consensus that central banks can prevent a depression under circumstances like this."

Here's where I believe that I differ from him and most everybody else. I believe that, prior to Lehman, and even after for a time, people did in fact still believe that the government could avert and deal with this crisis effectively. There has been an ongoing deterioration in that belief throughout this year, with it being almost completely shattered by the performance and effectiveness of recent government policies. A large part of this deterioration, I believe, has to do with a general feeling that the Bush Administration will manage to make things worse. However, because this belief was so widespread and endemic to our actual system of governance and finance, there was no Plan B. Consequently, when the crisis hit, everybody had placed their bets on the government.

From a philosophical perspective, these assumptions limited and limit our possible responses, in the same way that a sentence's meaning is limited by its context and presuppositions. That's why, contrary to what many Kantians believe, you simply cannot toss in any theoretical plan that you can come up with and expect it to work in this context. In fact, it will be as effective as gibberish is in a conversation.

"In a forthcoming book I’ve written with Professor George A. Akerlof of the University of California, Berkeley, we argue that current circumstances call for a couple of intermediate targets. If we can hit them, we may credibly be expected to hit the ultimate target of full employment — and keep inflation at bay. The intermediate targets should be announced forcefully, with an immediate effort to achieve them."

Yes Sir. On the double, Sir.

"First, there should be an intermediate target for conventional fiscal and monetary policy, one ambitious enough to restore full employment in a typical recession. (Fiscal policy is the taxation and expenditure proposed by the president and voted by Congress; monetary policy is the province of the Federal Reserve Board.) "

What's the target?

"This target may be inadequate, however, because we are not in a typical recession. Conventional fiscal and monetary methods may fizzle, as they did in the 1990s in post-bubble Japan. After its stock market and real estate debacle early in the decade, the government of Japan moved its budget into deficit and brought interest rates down to zero. But the economy never entirely recovered, and in due course the government debt rose to 1.71 times the annual gross domestic product, versus a current multiple of 0.74 in the United States."

Does that mean that we might hit the target and yet that not prove target enough? Yes, we don't want to end in Japan's pickle. But we might.

"Similarly, we just do not know whether these measures will work in this country. That is why we also need a second intermediate target, for credit. The ability to borrow should be restored to an appropriate level for a normal economy at full employment."

I think that's what I've been calling a Credit Stimulus. I dimly remember expecting TARP to be that. Well, not really expecting. Praying, more like it.

"This is crucial because the most salient problem in our institutions is the drying up of credit. Without credit, companies that count on outside finance will go bankrupt, requiring an impossibly large fiscal and monetary policy stimulus to achieve full employment."

And your remedy is? Give us the most salient solution, friend.

"Furthermore, as long as the credit crisis continues, the economy’s response to conventional fiscal and monetary policy may be drastically reduced. A person who cannot borrow, for example, is unlikely to buy a car, even if a generous fiscal policy has provided him with the needed down payment. Under the current circumstances, the Keynesian “multiplier,” the economy’s response to fiscal policy, may be unusually low. Our best econometric models just won’t tell us how low."

Chuck them, mate.

"FOR months, the Fed has been working to expand credit, and has invented some good methods for doing so. On Nov. 25, it announced a smart method to jump-start credit, called the Term Asset-Backed Securities Loan Facility, which would issue loans, using securities backed by newly issued consumer and small-business loans as collateral. The Fed has started paying interest on reserves to control the inflationary impact of such a policy."

I think that paying interest on reserves was more like an incentive to save, rather than lend. But that's just me.

"This plan and others like it are promising. But all the government loan programs announced so far represent only a tiny fraction of the $52 trillion of total credit market instruments outstanding. We will need to go much further and extend credit to households and businesses that would otherwise be ignored."

Fine. How do we do that?

"Along with fiscal and monetary policy, credit needs to be targeted on a scale that would get us out of our current economic mess. That’s what Washington should do now."

It's fine to want full employment, but, unless he's arguing that the government just up and guarantee everybody a job, I'm not sure how to get it. If that's what he's saying, why not just say that the government should guarantee everybody a job?

The one point I definitely agree with him on is that this is a Crisis Of Confidence, and policies must address it.