"Romer roundtable: Think, plan, and tell us the plan
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- Economist.com | WASHINGTON
- Romer roundtable
CHRISTINA ROMER makes two traditional mistakes. First, like generations of policymakers before her, she counsels "trust us". They will know the right time to change from stimulus to restraint. There is no factual basis for "trust us". If policymakers at the Fed and in the government had the ability to time their actions appropriately, we wouldn't be in this mess. For it was they who allowed banks to circumvent the Basel regulations, that permitted Fannie and Freddie to expand beyond any reasonable standard, that brought us too big to fail and, as John Taylor has shown, abandoned a policy that brought us almost 20 years of the Great Moderation. Suffice to say that their forecasts are no better than others, and none are very accurate. Short-term judgments are often wrong and misleading. Best to avoid them.
Second, like most other defenders of this inflationary, low productivity policy, Christina puts the choice as whether we act against recession now or against inflation now. That leaves out a multitude of options. Two of my former colleagues won the Nobel prize for showing that it is much better to think now about the policy problem that lies ahead. Yes, avoid the mistake of doing what seems urgent today while neglecting the longer-term consequences that will be the problem of the future. Much better to think about the path the economy will be on; yes, stimulate now to reduce unemployment, but avoid creating a big inflation in a year or two. And even announce in advance how you propose to reduce the high money growth rate and the excessive deficits. Don't just say you'll do it, think, plan, and tell us the plan.
Further, the administration agreed to a terrible stimulus package. Our long-term problem is to slow the growth of consumer spending, so that we can export more to service the debt we sold to foreigners. That calls for more investment and higher productivity growth. Cap and trade, health care, and the so-called stimulus either tax businesses to subsidise consumers or simply shift resources to consumption. Keynesians should read Keynes. He opposed spending to increase consumption; he favoured planning to increase investment. And if they can't stomach Milton Friedman, they should read Franco Modigliani, a leading Keynesian. Both showed that temporary tax reduction was an inefficient stimulus programme."Me: