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The Need for Regime Change
Current and former members of the administration largely express the view that there's not much more they could realistically have done to stimulate the economy, and the Federal Reserve hints vaguely at the idea that further unorthodox measures would carry unspecified risks. But nobody currently or formerly near the centers of power is saying what they conclude from this.
The old plan was this: Use interest rates to stabilize demand and ensure full employment.
And the old question was: What if 0 percent nominal interest rates are inadequate to produce full employment?
And we had two answers: Use quantitative easing and discretionary fiscal policy to stabilize demand and ensure full employment.
But we don't have full employment, and the word from the Treasury and the Eccles Building seems to be: Quantitative easing and discretionary fiscal policy on the scale needed to stabilize demand and ensure full employment are politically or institutionally impossible.
This is a really big deal. It means that either we need to discover a new paradigm for stabilizing aggregate demand, or else we need a whole new way of thinking about economic policy choices that doesn't assume the economy will operate at nearly full employment over the long-term. New paradigms for demand management seem to strike a lot of America's policy elite as uncomfortably radical, but if you think about it the implications of the other option are much more radical. All kinds of ideas economists and businessmen would normally dismiss as fallacies could, in fact, be true if the government is simply abandoning the idea of full employment.
http://www.slate.com/blogs/moneybox/2012/02/01/the_need_for_regime_change.html
The old plan was this: Use interest rates to stabilize demand and ensure full employment.
And the old question was: What if 0 percent nominal interest rates are inadequate to produce full employment?
And we had two answers: Use quantitative easing and discretionary fiscal policy to stabilize demand and ensure full employment.
But we don't have full employment, and the word from the Treasury and the Eccles Building seems to be: Quantitative easing and discretionary fiscal policy on the scale needed to stabilize demand and ensure full employment are politically or institutionally impossible.
This is a really big deal. It means that either we need to discover a new paradigm for stabilizing aggregate demand, or else we need a whole new way of thinking about economic policy choices that doesn't assume the economy will operate at nearly full employment over the long-term. New paradigms for demand management seem to strike a lot of America's policy elite as uncomfortably radical, but if you think about it the implications of the other option are much more radical. All kinds of ideas economists and businessmen would normally dismiss as fallacies could, in fact, be true if the government is simply abandoning the idea of full employment.
http://www.slate.com/blogs/moneybox/2012/02/01/the_need_for_regime_change.html
